STREET DOGS: Warren Buffett on active and passive investors
‘Whichever group has the lower costs will win’, writes Michel Pireu
From Warren Buffett’s 2017 letter to Berkshire Hathaway shareholders: A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition [always] do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe — the active investors — must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors … let me put it into a simple equation. If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win. And if Group A has exorbitant costs, its shortfall will be substantial. There are, of course, some skilled individuals who are...
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