New York (Reuters) – Billionaire Warren Buffett, whose stock picks over several decades have enriched generations of Berkshire Hathaway shareholders, delivered a black eye to the investment industry on Saturday, urging ordinary investors to buy plain-vanilla index funds.
"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," Buffett said in his annual letter to shareholders.
"Both large and small investors should stick with low-cost index funds," he added.
Buffett, 86, used his investment savvy to build Berkshire into a powerhouse conglomerate and become the world's second-richest person. Known to fans as "the Oracle of Omaha," he estimated that the search for outperformance has caused investors to "waste" more than $100 billion over the past decade.
Jack Bogle ‘A Hero’
On Saturday, he called Vanguard Group founder Jack Bogle "a hero" for his early efforts to popularize index funds.
Berkshire itself has done far better, with its stock price gaining 20.8% per year since Buffett took over in 1965, dwarfing the Standard & Poor's 500's 9.7% gain, including dividends.
Yet Buffett said most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform.
In 2014, Buffett said he plans to put 90% of the money he leaves to his wife Astrid when he dies into an S&P 500 index fund, and 10% in government bonds.
During the financial crisis, Buffett bet a founder of the asset management company Protege Partners LLC $1 million that a Vanguard S&P 500 index fund would outperform several groups of hedge funds over years.
The index fund is up 85.4%, Buffett says, while the hedge fund groups are up between 2.9% and 62.8%.
On Saturday, Buffett said he has "no doubt" he will win the bet. He plans to donate the money to Girls Inc. of Omaha.
Some Are Listening
While Buffett said no pension funds or "mega-rich individuals" have taken his advice on index funds and that "human behavior won't change," some investors are following his lead.
Despite a roaring stock market in the United States, actively managed mutual funds bled $342 billion last year, their second-straight year of outflows.