Accountable Update

The Oracle Is Wrong About Foreign Stocks

When the third richest person in the world speaks, people listen. Some even pay millions of dollars just to have lunch with him.

Do you know who I'm referring to? He is the guy that is known as the “Oracle of Omaha”. The one that bought a struggling textile manufacturer in the mid-1960s and grew it to the fourth largest publicly held company in the world.

He is the legendary investor, Warren Buffett.

Don’t get me wrong, I greatly admire and respect Mr. Buffett. His value approach to investing has been shown to have persistent advantages over other investment styles. His famous $1,000,000 bet that an S&P 500 Index fund would beat a basket of carefully selected hedge funds over a 10 year period is the stuff of legend. But even legends occasionally are wrong.

Recently, in an interview on CNBC, he suggested that investors should be biased against investing outside of the US.

The Oracle is wrong.

Mutual Fund Landscape

Last week, I took a look at how the growth of index funds has led to more scrutiny of passive investments and their impacts on the market. This week, we’ll look at more evidence of the futility of high cost active management as compiled in DFA’s recently updated annual Mutual Fund Landscape report. The analysis shows that a majority of fund managers evaluated failed to deliver benchmark-beating returns after costs.

Index Fund Attention Abundance

I attended a meeting in the early/mid 2000’s where Abigail Johnson, now the president and chief executive officer at Fidelity Investments, was the featured speaker. She tried to make the case that if everyone bought index mutual funds, that security prices would never change. In other words, she claimed that if index funds become too popular and investors “blindly” bought an index’s underlying holdings, that sufficient price discovery may not happen in the market.

So was Ms. Johnson right? Should the rise of index funds be a cause of concern for investors?