The Most Important Investment Lesson In The World

“If you stick around till lunch, I’ll share with you what I believe is the most important investment lesson in the world”, Warren Buffett told me (okay, and 40,000 others) in Omaha last weekend at the Berkshire Hathaway annual meeting.

At which point my old man, an Omaha virgin, elbowed me in the ribs and said with a grin, “This is what we came here for”.

What was Buffett’s secret?

Smart beta? Emerging markets? Hedge funds?


But if you’re a bloke from, say, Ouyen, it’s not a bad guess.

After all, it’s not hard to be intimidated by the world of high finance. Billionaires. Private jets. Sophisticated finance-speak.

Let’s face it, no one living in suburbia gets access to the hottest hedge funds on Wall Street. They’re closed shops. You need serious bucks and high-finance connections to get access to the most exclusive funds run by the sharpest investors in the world.

The refreshing news is that Buffett has spent years poking fun at Wall Street.

And, as always, he’s put his money where his mouth is.

You see, back in 2007 (when I was an Omaha virgin myself), Buffett made a famous million-dollar bet.

He bet that a basic, no-brainer index fund that simply tracks the market will outperform the most elite hedge funds over 10 years.

A New York firm, Protégé Partners, took Buffett at his word and put their money into five of the best hedge funds they could find. We’re talking incredibly smart money managers with highly sophisticated strategies. They can bet against the market, they can get in and out of the market when they want, and they can scan the world for the best opportunities.

It was certainly a ballsy bet from Buffett — particularly since the timeframe would include the Global Financial Crisis (a time when the index tracker, well, tracked the market straight over a cliff).

Back to Omaha.

Lunchtime came around, and Buffett gave his highly anticipated speech.

He began by putting up a slide showing how his million-dollar bet was going.

You guessed it: the no-brainer index fund had wiped the floor with the high-fee hedge funds — outperforming them, to date, by a staggering 40 per cent.

Here starteth the lesson.

(As you read this, understand that Buffett is referring to stockbrokers, highly paid fund managers, financial planners and asset consultants.)

Over to Mr B:

“Supposedly sophisticated people, generally richer people, hire investment consultants. And no consultant in the world is going to tell you, ‘just buy an S&P index fund and sit for the next 50 years’. You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.

“So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks’, or ‘this manager is particularly good on the short side’. And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end. And then those consultants, after they get their fees, they in turn recommend you to other people who charge fees, which … cumulatively eat up capital like crazy.

“And they always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before.

“I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money”, said Buffett as the crowd roared with laughter.

At this point, Buffett’s sidekick and Berkshire Vice Chairman, Charlie Munger (who is a sprightly 92 years old and who’d consumed more Coca-Cola and peanut brittle throughout the day than was at my three-years-old’s last birthday party), chimed in and said:

“Warren, you’re talking to a bunch of people who have solved their problem by buying Berkshire Hathaway … and that has worked out even better.”

He’s right.

From 1965 through to the end of last year, Berkshire shares have risen 1,598,284 percent, versus the S&P 500’s 11,355 percent (and less for most professionally managed funds).

In a few words, Buffett’s investment lesson was this: don’t pay over-the-top fees.

And I agree wholeheartedly. (At Barefoot, we have our own independent investment newsletter which has consistently beaten the market by focusing on ultra-low-cost funds and savvy stock picks.)

Says Buffett: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”

Tread Your Own Path!

The Gag Falls Flat

What I took out of the deliberately boring budget, is that young first home buyers are screwed.

The government is clearly making property prices an election platform. That’s why they’re not touching negative gearing — despite the fact that the Prime Minister has referred to it as an ‘excess’ in the past.

Coupled with that, the retrospective changes to super (cutting what you can put into super, both pre and post tax, and limiting how much you can hold), means many high income earners will divert their cash from super to property.

Finally, when you add in this week’s interest rate cut to a historic low of 1.75 per cent (with more to come), you can see what I mean when I say that young people are screwed.

The Prime Minister, in full election mode, suggested on morning radio that wealthy parents should ‘shell out’ to buy their kids a home. Okay, so it was meant to be a gag, but it was in poor taste for the millions of young families who are struggling to save up for a deposit.

Truth is my parents couldn’t afford to buy me a house. And I wouldn’t have wanted them to anyway. Saving up a deposit and buying a home under your own steam is one of life’s great achievements. It’s a pity that this government doesn’t understand that, and instead makes it even harder.