Coming back to the Warren Buffet’s 2005 challenge, Warren Buffet had challenged the entire Mutual Fund Industry. In the opinion of Mr. Buffet, in the mutual fundʹs industry, the most actively managed Hedge Funds charge so hefty fees due to which they won’t be able to give better results than the Index in the long-run say over a period of 10 years. If any of the Hedge funds give high returns as compared to the Index, then Warren Buffet had agreed to pay them USD 5 lakhs. And if the Hedge Fund lost the bet, then they had to pay Mr. Warren Buffet USD 5 lakhs.
When Mr. Buffet had initially declared the bet, no one had accepted it for over a period of 2 years. Later, at the end of the year 2007, a company called Protégé Partners accepted the challenge. But this time the bet was for about USD 10 lakhs. Thus, the challenge had started in the year 2008.
Now, Mr. Warren Buffet was of the opinion that over a period of 10 years Index will beat Hedge Funds w.r.t the returns generated. Hence, he chose the Vanguard S&P 500 Index Fund. This fund invests in the top 500 companies of the Index. Talking about Protégé Partners, they chose about 5 Hedge Funds for the challenge. Thus, the bet was on.
We are all aware of the 2008’s Subprime Crisis, during that time the US Stock Market faced the biggest market crash of all time and the twist here was that Mr. Buffet had invested in the Index and that Index was the worst hit by the crisis. Due to this crisis, Mr. Buffet’s investment had gone down drastically in comparison to the Hedge fund. As the hedge fund was managed actively it was not that badly affected.
So, during the first year of the challenge, Mr. Buffet’s Index fund was lagging behind in comparison to Hedge Fund. But after 10 years when the challenge ended, the story has reversed entirely. Index fund had beaten Hedge funds with a huge margin as Index fund had given high returns compared to Hedge funds. Thus, Mr. Warren Buffet has successfully won the bet. Even in the story of tortoise v/s hare, we have seen that whatever be the pace of the hare, but tortoise’s consistency made him the winner in the end. Similarly, here Mr. Buffet’s intelligence made him the winner. Also, Passive Fund Management had beaten Active Fund Management in the 10-year challenge. The prize money that Mr. Buffet received after winning the challenge, he donated it to the charity called Girls Incorporated, Omaha.
Later, after the challenge ended, Mr. Warren Buffet in a conference talked about his analysis of the competition. He said that “If you believe in the growth of the US if you feel that the US economy is going to boom further than if you wish to grow alongside the economy and make great returns in the long-run then there is no use of opting for an actively managed fund. If you even invest in the passively managed fund then you can earn good returns.”
The fund which Mr. Warren Buffet had chosen to invest in for the challenge i.e. Vanguard S&P 500 which is an Index fund that was founded by John Bogle in the year 1975. Mr. John Bogle is called the ‘Father of Index Fund.’ Also, Mr. Buffet considers John Bogle a ‘hero’ and he also believes that if at all a statue is to be made, there should be a statue dedicated to John Bogle for his contribution towards the betterment of the USA’s population. Because it was John Bogle who taught the people that investing in the Index Fund will give them better returns in the long-run.
When John Bogle was told that Mr. Buffet considers you to be a ‘hero’, he replied saying, “The person whom I consider to be a hero, called me his hero. What could be a better compliment than this!” Adding to this, he also said, “I am no hero, I am just a common man who founded the Passively Managed Index Fund.”
If we analyze the US stock market data, we’ll find that there are only 4 such actively managed mutual funds that can or are able to beat the Index fund there. With respect to this John Bogle said that “If you think that your mutual fund should fall in one of these 4 mutual funds that are beating the Index fund then it is similar to finding a needle in a room full of husk.”
If we carry out a research study, then we’ll find that be it Warren Buffet, John Bogle, Charles, Author Tony Robbins or be it Father of Modern Finance Dr. Eugene Fama, all these have been honored with a Nobel Prize for their research and of them believe that if you wish to invest in mutual funds then the best mutual fund amongst all is Index Fund.
In the Indian context, if we check the records of the previous 10 years then there are about 50 such mutual funds that have beat the Index funds to give more returns. So now what should we opt for the Actively Managed Mutual Fund or Index Fund?
Stay tuned till our next blog to know about it!!!
On the other hand, if you have no knowledge of the share market, but you still want to earn good returns in the long-run then you can simply opt to invest systematically in the Index fund, Gold & Debentures.
As you know, we have a tie-up with Upstox, so if you wish to invest in mutual funds or index funds, you can directly go on their app and in the mutual fundʹs section, you can easily opt for Invest fund there.
Stay tuned for our next blog…
Happy Trading, Happy Investing!!!
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