Why Warren Buffett’s company can’t beat this one investment product
Business | 11 Dec 2019
Warren Edward Buffett is widely known as one of the most successful investors in the world. With a net worth of US$86 billion, he consistently lands in the top spots of Forbes’ lists of billionaires. Most of his wealth comes from his company, Berkshire Hathaway. Which is also famous for having the highest stock price in history at US$333,640.
Thus, it comes as a surprise when Warren Buffett stated that his stock managers Tom Combs and Ted Weschler “trailed behind the S&P 500 a tiny bit”.
For those that aren’t as investment savvy, the S&P 500 is an exchange-traded fund (ETF) that holds stocks in 500 of the largest companies in the US market.
The S&P 500 is typically used as an index to measure the performance of the equity market as it helps give an overall look at the equity market. In Singapore, SGX uses the FTSE Straits Times Index (STI). Since our market is much smaller than the US, our index only tracks the top 30 companies.
What’s an exchange-traded fund (ETF)?
An ETF is a basket of securities that tracks the underlying index.
ETFs are traded throughout the day like stocks. Hence, ETF share prices constantly fluctuate. The goal of an ETF is to try and match the performance of the index as close as possible through the use of various passive or active strategies.
The securities held can vary drastically from region to industry, much like how the top companies can vary in their line of business. ETFs can also specialise in a certain security such as stock ETFs, bond ETFs or currency ETFs to name a few. In Singapore, some of the more popular ETFs include SPDR STI ETF, Nikko AM STI ETF and SPDR S&P 500 ETF.
ETFs are a good low cost investment product. It has lower management fees than actively managed funds since it doesn’t require active fund manager to manage. ETFs should perform exactly like its underlying index, no more, no less. This performance tracking investment product will provide market performance returns. Coupled with low brokerage fees, this make ETFs very attractive and simple to understand for starting investors.
Shareholders earn from ETFs like they would a from a normal stock. They are simply a collection of them of which the shareholder buys a portion of. They are entitled to any dividends, interest or liquidated value of the shares that were given during the financial year. In addition, shareholders can also realise gains from the fluctuating share prices.
Why can’t fund managers beat the market?
It isn’t to say that it’s impossible for fund managers to beat the market. Through skill (and sometimes luck) fund mangers can beat the market return. However, beating the market consistently is almost unheard of though there are rare cases (Bill Miller, Peter Lynch). Beating the market takes a massive amount of skill to be able to time the market correctly.
ETFs are a great tool to be introduced into investments. However, one should not assume every well-performing ETF will nab you the same returns the next year. It is also important to analyse your financial portfolio as a whole and set aside money for savings, investments, insurance and retirement.
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