Warren Buffett hates fees.
In his latest annual letter to shareholders, the Berkshire Hathaway (BRK-A, BRK-B) CEO goes on a lengthy missive about how nothing hurts the average investor more than fees charged by Wall Street pros. “As Gordon Gekko might have put it: ‘Fees never sleep,'” Buffett quipped.
It is, then, not superior investment returns but lower fees that Buffett sees as the real innovation made over the last generation of investors. And in Buffett’s view, no one has done more for the average investor than Vanguard founder Jack Bogle.
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Buffett writes.
“For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or, as in our bet, less than nothing — of added value.
“In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.” (Emphasis added.)
Vanguard, which has about $4 trillion in assets under management, is seen as the industry leader in cutting fees for investors. Their S&P 500 index mutual fund, which is designed to simply track the performance of the benchmark index, charges 5 basis points per year in fees.
And this chart from Vanguard is perhaps the easiest distillation of the company’s motivating principle: minimize fees to maximize returns.
This philosophy has led to an industry-wide “race to zero,” as a Bloomberg article recently put it, as firms compete to lower expenses for mutual funds and ETFs.
Now Buffett, as someone who over the course of his investing career has significantly outperformed the S&P 500, knows that it is not an entirely futile effort for those who enter the field.
“The job, after all, is not impossible,” Buffett writes.
“The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well.”
And so for Buffett, choosing low-cost investments are simply about stacking the odds in your favor.
As Buffett writes, “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”