Warren Buffett is wrong on passive investing


According to this manager, he takes umbrage with Warren Buffett’s advice (e.g. passive index funds) on investing. I know most of us (including me) have our investments in passive funds and there are a number of studies that demonstrate that passive funds outperform ones that are actively managed, but I just thought I’d see what people’s perspective was.



I’m with Warren.


Me too…just thought it would provoke conversation. I mean if Dave Ramsey had his way we would be investing in a lot of American funds with that 5.75% load at the beginning of the fund.


I think the article is a hard sell, especially to this crowd (a finance forum). First of all, the person writing the op-ed is chairman and CEO of an investment fund company. Of course he wants you to believe that managed funds are better. Huge red flag that the piece is likely to be biased.

Then, there is some blatantly misleading information in the piece. When he says that indexes “provide no cushion against down markets,” this is absolutely false. There are bond indexes and plenty of other indexes that are less volatile than a 100% equity index like the S&P500. Yes, he was initially speaking about the S&P500 index, but when he makes the statement about volatility, he is speaking about indexes in general, and does not limit his statement to only all-equity indexes.

Then, there is this statement:

An investor who was smart enough to have put $10,000 in the first S&P 500 index fund 40 years ago would have more than a half million dollars today. That said, someone who invested the same amount with the best five active funds from American Funds (The Growth Fund of America, AMCAP, Washington Mutual Investors Fund, The Investment Company of America and American Mutual Fund) would have achieved more wealth.

Okay…how much more? Is it actually a significant amount, or is it like, $5? Again, speaks to bias on the part of the author.

Basically, I don’t trust the source, and although the conclusion is sound (we need to talk about how to save and invest to retire), the article reads as just pushing the author’s agenda (buy my funds!).


Well said @Katrina, totally agree with you.

The article is just outright bad and misleading. Warren Buffett statement just relies on statistics and is seen purely from the private investors view which is great! Instead of saying he is right he made a bet, giving it all to charity if he wins is just awesome!

It´s nice that he managed to piss some guys off :smile:


I just wrote about this today! I’m with Warren, and so are most investors. According to Moody’s, by 2024 more than half of all money invested will be in index funds, rather than actively managed funds.


He is not wrong. I believe his main point is that the fees are what get you. I recomend the tyranny of compounding fees. But a large diversified basket of large dividend stocks (which is what an index fund is) will do the same thing - avoid fees, provide great returns and prevent total loss of capital.


And who knows if the numbers given by the American Funds reflect the cost of fees and other charges!


“Despite trillions of dollars that have flowed into passive investments, only half of the more than 1200 investors we surveyed online last year were aware that index funds expose them to 100 percent of the volatility and losses during market downturns”

This quote seems like it’s an issue with the investors themselves, not passive funds. I’m not sure if the author was trying to scare people about funds or not. I think @Katrina said it best overall though, this is written by someone with a hand in the game.


Even if the American funds did do significantly better than an index, the point of passive investing is that you couldn’t have selected those funds out of all that were available. You could make the same point about individual stocks-investing in Amazon back during the tech crash of 2001 would have given you great wealth today compared to the S&P 500. After all, if you bought it in March of 2001 at $10.19 a share, and today it’s worth $848.64, you would have made a killing! But back then no one knew that Amazon would be the successful company out of hundreds (thousands?) of tech companies that went to zero.

The same is true of mutual funds-past performance is no indication of future returns. Most unsuccessful mutual funds are folded-either liquidated or folded in to a different fund. So funds that survive are more likely to be successful, but you don’t see the performance of all those funds that ended. Since you don’t know which funds will be successful, why speculate-buy and hold the index, so you know you’ll be getting market returns.


Like Mr. Buffett, our firm is 86 years old. When we add up the history of our 18 equity funds, they have 653 years of investment experience.

Mr. Amour,

There are 822 financial blogs in the Rockstar Directory. Assuming an average of 10 years of investing experience, we have 8,222 years of total investment experience.

We agree with Warren and Jack.

Someone who doesn’t trust your math


Hindsight is 20/20. It’s easy to pick out the good managers looking backwards. It’s next to impossible to do it looking forwards.


I look at it like this: Warren Buffet is one of the most brilliant stock market investors of all time. He has averaged a 20% return on an annualized basis for over 50 years. Only Peter Lynch and a few other people have ever matched this. Warren is an extreme case. On the other end of the spectrum are passive index funds, which have probably returned about 10%. If you are someone who loves to read about companies, and understands the kind of value investing Warren pursues, and can pick undervalued stocks so successfully that you can routinely match or beat the S&P 500, then go for it. If, however, you don’t want to research and read about individual companies, then you’re way better off, statistically, buying an index fund than paying a salesman to sell you a mutual fund and losing either the load or annual management fees.

I love searching for, and investing in, undervalued companies, but if my returns start falling below the S&P 500, then I’ll switch to index funds or some other kind of investments that can at least match the performance of the overall stock market.


Passive investing doesn’t exist.

An index is a set of rules that decides what instruments to include, how to reward performance (market cap or price) and how often to reset the weightings.

The S&P 500 is a set of rules that rewards high market cap stocks (ones that trend up) and punishes low market cap stocks (ones that decline). The index’s weightings change every day as each stock’s market cap changes.

By design, it’s active - meaning it is always making changes to the composition of the index.

Indexes have the luxury of always following their rules while “active” managers may have much less discipline. Index outperformance derives from better discipline.


Index funds are active too. An index must decide on which instruments to include, how to weight them and how often to adjust the weighting. Indexes have the advantage over human managers by having perfect discipline of executing the rules.


Yes! Someone finally said it. Love it!

I very much understand the low costs benefits of Index Funds. That is the big turbo boost.
But that is it. The mix isn’t special at all:


Same for me - I am about agreeing with what the companies that produce returns for me do - even if it means losing to the index funds. Luckily that hasn’'t been the case yet but when it eventually happens that is cool. Maximizing ones money isn’t everything in my opinion. I am ok with second place.


I’m okay with second place occasionally, but if I started to consistently fall below the S&P 500 index funds or other similar index funds, then I might decide to shift in that direction. As it is, because I’m ahead of the index funds on a long-term basis, I’ll keep actively buying what I consider to be undervalued stocks and selling stocks that I consider over-valued. I find it a fun activity even though I occasionally buy a stock that underperforms. It only takes one big winner to make up for a lot of so-so performers.


Yes, the SP500 does not prove to be a very good trading system, but it does have perfect discipline.

This may help in proving that perfect discipline, even on an OK strategy, beats intermittent discipline on a “perfect” system.

Everyone seems to be searching for the perfect system. There’s no perfect system much like there’s a perfect car. There is, however, a perfect car for you.


Warren Buffett is also predicting a major market crash in 2018, the Warren Buffett Indicator is less mysterious than it sounds. It might as well be called the common-sense indicator. It’s simply the relationship between gross domestic product (GDP)—or the sum total of a country’s economic activity—and the value of stocks in the S&P 500. So, in simpler terms, the Warren Buffett Indicator in terms of Wall Street measures market capitalization versus U.S. GDP. If we believe warren buffett predictions a stock market crash in 2018 is meant to happen.