Lesson 2 of 3 · 3 min · Funds
The fund they laughed at
The first index fund, and a ten year bet with a million dollars on it.
In 1976 John Bogle’s new company, Vanguard, launched a fund that just bought the S&P 500. No stock picking at all.
The industry mocked it as "Bogle’s folly". It hoped to raise $150 million and got about $11 million.
Decades later, index funds hold trillions of dollars. The idea was simple: most managers do not beat the market after their fees, so why pay for trying?
In 2007 Warren Buffett bet a million dollars that a plain S&P 500 index fund would beat five hand picked funds of hedge funds over ten years.
From 2008 to 2017 the index fund gained about 126%. The best of the five gained about 88%. The worst, about 3%. The money went to charity.
Quick question
Why could a plain index fund beat professional hedge fund pickers over ten years?
- It took bigger risks
- Their fees ate most of their gains
- It was lucky one year
Show the answer
Their fees ate most of their gains
Hedge funds and funds of hedge funds charge layers of fees. Even when the picks are fine, the fees come out every year and compound against you.
Keep this one
Cheap and boring usually wins.
Where this comes from
John C. Bogle, "The First Index Mutual Fund", Bogle Financial Markets Research Center, 1997. Warren Buffett, Berkshire Hathaway shareholder letter for 2017: index fund +125.8%, the five funds of funds +21.7%, +42.3%, +87.7%, +2.8% and +27.0% (the fourth closed in 2017, after nine years). The winnings went to Girls Inc. of Omaha.