With the annual meeting of Berkshire Hathaway in the horizon, one of Warren Buffett’s most memorable investment advice has become more important than ever. The advice was revisited in Buffett’s annual shareholder letter which was sent earlier in the year. According to Buffett, economic elites have been losing money in management fees that, when combined, could run into billions when they could easily get similar returns by investing in a low-cost index fund.
“My regular recommendation has been a low-cost S&P 500 index fund. … my friends who possess only modest means have usually followed my suggestion. I believe, however, that none of the mega-rich individuals …. followed that same advice,” Buffett wrote.
High management fees
But instead of investing in low-cost index funds, the world’s most well-known investor added that the elites instead ignored his advice and turn to managers or consultants who charge high fees.
Buffett pointed out that the reason investment consultants would never advice their clients to invest in low-cost index funds that replicate the Standard & Poors 500 is the fact that it would be career suicide for them since they would no longer be relevant. In order to make it look like they are offering added value to their clients, the investment consultants tend to use esoteric language.
Buffett goes on to blame these wealthy clients for their sense of entitlement which leads them to feel that they will only get value if they spend more money than the rest of the masses. This is also aided by their disdain for things that are commonly and widely available to everyone else and instead preferring what is limited to a select few.
According to Buffett’s calculation, this has led to these elites wasting over $100 billion in the last 10 years this way. Buffett believes that human nature will not change and the elites will continue in their behavior. In that regard, Berkshire Hathaway’s chief executive officer believes that the investment advisors and consultants who go out of their way to satisfy this niche will continue to reap handsomely.
During the upcoming Berkshire Hathaway meeting, Buffet together with the conglomerate’s vice-chair Charlie Munger will allocate five hours during which they will answer questions. Typically the Q&A session is dominated by investment advice and questions as opposed to the operations of Berkshire Hathaway.
This year’s meeting comes against the backdrop of the conglomerate announcing that it had sold around 30% of its shares in tech giant IBM. Berkshire started buying a stake in IBM in 2011 and eventually became the tech giant’s biggest shareholder.