Warren Buffett bets big on Vanguard

03 March 2017 | Indexing


Bill McNabb

Commentary by Vanguard Chairman and CEO Bill McNabb.

As someone who has worked closely with Vanguard founder Jack Bogle for more than 30 years, I've gotten a kick out of seeing his ideas—and Jack himself—receive recognition that seemed so unlikely when he first began his "eccentric" campaign for index fund investing in the 1970s.

So when I saw kind words about Jack from none other than Warren Buffett, I was reminded once again that Jack has proven all the naysayers wrong, persevering through everything from industry criticism to a heart transplant.

In the investing world, there is arguably no shareholder letter more widely anticipated than the one from Mr. Buffett's Berkshire Hathaway. Typically released every February, Mr. Buffett is candid—even blunt—about how his firm performed, going division by division in great detail. He also doesn't shy away from speaking up about industry trends and whether these trends are serving investors well.

A tip of the cap to Vanguard's founder

In this year's letter, Mr. Buffett singles out the long-term positives of low-cost investing, and the role Vanguard's founder has played in making low-cost investing so widely available.  "If a statue is ever erected to honor the person who has done the most for American investors," he writes, "the hands-down choice should be Jack Bogle."

John C. Bogle

He goes on to add that in the early years Jack was "frequently mocked by the investment-management industry" for urging investors to place their money in low-cost index funds. And now Jack has the "satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned."

When it comes to Vanguard's low-cost investing, Buffett has put his money where his mouth is, as part of a US$1 million bet. The legendary investor wagered with a New York investment firm that a Vanguard index fund tracking the S&P 500 Index would outperform a collection of more expensive hedge funds over a ten-year period starting January 1, 2008. Mr. Buffett and the firm each put up US$500,000. The winner will donate the money to charity.

Mr. Buffett reports in his latest letter that, as of the end of 2016, his bet on the index fund is winning by a wide margin.

Without the drag of high fees, active management can succeed

The well-deserved praise for index fund investing shouldn't be read as a dismissal of the merits of active investing, however.

After all, if anyone knows that it's not impossible to outrace the market, it's Warren Buffett. Indeed, in the same letter Buffett writes, "There are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches."

In the end, he adds, what usually sabotages these managers' efforts are high fees. And that is a point Jack Bogle has been making for decades.  

Bill McNabb signature
F. William McNabb III
Chairman and Chief Executive Officer
The Vanguard Group, Inc.

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