More than six years ago on January 2008, Warren Buffett made a 10-year bet with asset management firm Protégé Partners that an investment into a low-cost index fund tracking the S&P 500 (a broad American share market index) would outperform a portfolio of funds of hedge funds built by the latter. Buffett’s argument was simple (emphasis mine): “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.” Earlier this May, I had the fortune…
More than six years ago on January 2008, Warren Buffett made a 10-year bet with asset management firm Protégé Partners that an investment into a low-cost index fund tracking the S&P 500 (a broad American share market index) would outperform a portfolio of funds of hedge funds built by the latter.
Buffett’s argument was simple (emphasis mine):
“A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”
Earlier this May, I had the fortune to attend Buffett’s Berkshire Hathaway Annual Shareholders’ Meeting in Omaha in the USA. During the meeting, he shared about the progress of his bet with Protégé and the results were clear. The S&P 500 index fund had delivered cumulative returns of 43.8% since the start of the bet. The returns of Protégé Partners’ carefully curated selection of hedge funds? 12.5%. The difference in returns is largely down to the high fees that were charged by Protégé’s funds.
This is also an apt reminder for investors in Singapore about the importance of fees after a sea-change in our investing environment here was revealed last Friday in a joint announcement by the Monetary Authority of Singapore and stock exchange operator Singapore Exchange Limited (SGX: S68). The press release contained the following information:
“To improve retail investors’ access to a broader range of listed securities, particularly blue-chip stocks, SGX will reduce the board lot size for securities listed on SGX from the existing 1,000 shares to 100 shares in January 2015. SGX will announce details of this initiative by end-August 2014.”
Simply put, lot sizes would now be reduced for shares in Singapore’s market come January 2015, a move which can dramatically increase the accessibility of high-priced shares for retail investors with more limited means. Shares such as DBS Group Holdings Ltd (SGX: D05), Jardine Matheson Holdings Limited (SGX: J36), and Jardine Cycle & Carriage Limited (SGX: C07) – with their share prices of S$18.17, US$59.49, and S$46.18 currently – would be a lot more affordable a few months into the future; one lot of these shares would have cost investors tens of thousands of dollars under the existing lot-size rules.
But though the change in lot sizes would be a boon for retail investors in their quest to build up a portfolio of shares, the importance of trading fees would have to be highlighted here. Currently, it’s yet unknown whether the brokerage houses in Singapore would adjust their minimum trading fees after the lot-sizes changes come into effect. As highlighted by my colleague James Yeo in March this year, majority of the big local brokerage firms have a minimum commission of S$25 per trade for trade sizes under S$50,000.
With a minimum fee of S$25 per trade, the imperative is on individual investors to determine if the smallest purchases they can make in the future (after the lot-sizes changes come into play) would still make any economic sense.
This gentle admonition of mine might seem like a contrived attempt by me to overstate the obvious. But, as we’ve shared previously here at Fool Singapore, I’ve increasingly come to realise the following:
“Most investing commentary is focused on how to bring investors from average to above average — from zero to plus five, in Seligman’s terms. And that’s great! Many can benefit from it. There are a lot of brilliant financial minds you can learn from. If you’re an avid investor, today’s financial media is probably the best it’s ever been.
But as Seligman realized with psychology, a singular focus can leave a profession half-baked. It can actually alienate most people who need the opposite kind of help [getting from negative five to zero].
And most investors do need the opposite kind of help.”
Buffett’s bet with Protégé has shown clearly how important fees are in determining an investment’s returns. When it comes to our own investing activities as individual investors, it thus pays to bear in mind the importance of the commissions we pay to our brokers.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.