If your wife is having a baby, you’re better off calling a midwife than trying to do it yourself. And if your pipes are clogged, you should probably call a plumber. Most professions provide value compared to what amateurs can accomplish on their own. Overall, however, the investment industry doesn’t provide that value.
Trillions, own translation
A little later, it says:
Buffett compared the selection of fund managers, who are often seen as experts with impressive track records, to a coin toss game. He said that if you have 1,000 people trying to guess the outcome of coin tosses, it is mathematically likely that about 31 of them will correctly guess five times in a row. This is meant to show that even if someone has success for a while, it doesn’t necessarily indicate special skill, but could simply be due to chance.
Trillions, own translation
The last point is particularly important. Statistically, it’s simply not unlikely that a fund manager will do a good job several times. This is how I also fell for a financial advisor back in the day, who kept telling me how well certain fund managers were doing their job. But in reality, you’re just paying a lot of money for them.
Of course, the book isn’t just about bashing fund managers. It’s fascinating to read that there were several groups working on index funds and that it’s not easy to calculate such a fund. How is the price determined?
Also interesting: Index funds and their relatives, the ETFs, may have a larger influence on the stock market than we realize. Their popularity is actually to the detriment of the market. Because the more ETFs are bought—let’s take the MSCI World, for example—the more the stock prices solidify, since the ETF has to exactly mirror the respective stock proportions, which in turn drives up the prices. The purpose of ETFs is thus circumvented by their own success.
Definitely a good read. However, it’s only available in English.
