Even Warren Buffett didn't beat indexing

February 07, 2020

Almost a decade ago, when I was helping my wife launch her medical practice, a firm named Practice Fusion heavily advertised a free electronic medical record. We were skeptical - clearly software construction was not free. Someone was paying, but they would never answer our questions as to whom. She passed.

Last week, the State of Vermont notched its largest criminal fine in history. Yes, the recipient of this high honor is the same Practice Fusion. Turns out, they made revenue by using their software to nudge doctors to prescribe opioids to patients, and then they took kickbacks from the transactions. I'm not sure even the financial industry could have dreamed up this level of awful.

Free is never really free. Lots of advertising surrounds free trades in the financial industry, but big finance has just moved the goalposts that define how they make money. In some cases they disassembled the goalposts and rebuilt them in the choir room, so it's really not obvious to the average participant where they are.

Keep this in mind when you hear "free." The words "transparent" and "simple" probably have more value.

Warren Buffett, arguably the world's greatest investor, underperformed his comparative index, the S&P 500, by over 22% in 2019. That is a large underperformance, and at the size of his firm Berkshire Hathaway, may be difficult to recoup.

To make matters worse, in almost all periods over the past ten years, had you bought his Berkshire Hathaway stock, you would have underperformed the index.

I use Warren not because he is bad, but because he is good. There are plenty of less talented hedge fund managers making billions of dollars convincing institutions that they can outperform, and hence deserve the fees.

Now, if you have investments at a firm like J.P. Morgan or Morgan Stanley, or Merrill Lynch or Edward Jones, do you really think the advisor or broker is going to outperform an indexing strategy if Buffett can't? Do you really think annuities, with their punishing fees and confusing rules, stand a chance? Those are questions to ask yourself.

Dan Cunningham

1. Health firm agrees to $145M fine. VT Digger 1/27/20
2. portfolioslab.com BRKA vs VOO, 2010 - 2020