Warren Buffett

Warren Buffet made a bet 11 years ago with anyone who wanted to take him up on it that net returns on a passive investment in an S&P 500 index fund would beat returns on any other actively managed fund the person on the other side of the bet wanted to select, over a 10-year period.  I think it was a $1 million bet, and both parties had to agree to donate the proceeds to a charity of his or her choice.  Last year, the bet ended, and the passive strategy won out.  A big portion of the reason Buffett made that bet is that fees on most actively-managed funds are 0.5% to 1.5% of Assets Under Management (AUM), and those fees really impair returns, especially when you consider their negative impact on compounding of returns over a meaningful period of time.  Though we’ll talk about passive vs. active investment strategies more later on in this course, I’d like to get you thinking about it now.  Comment on your thoughts about active management vs. a passive strategy of investing in an index fund with substantially lower fees (0.1% to 0.2% of AUM).