How To Profit From Passives Like A Billionaire

How To Profit From Passives Like A Billionaire
Underwater by Andy Deitsch. Why?

All You Need To Know About Passive Investing

This article is part of a series. To view all the articles in the series, click the button below.

All You Need To Know About Passive Investing

What's the simplest financial investment?  For the answer, see what Warren Buffett has to say on the subject of passives.

About Passives: Extract From A Letter Warren Buffett Wrote To His Wife


My advice to the trustee could not be more simple: put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s).  I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

Warren Buffett On Passives In February 2014

For a more detailed explanation of why passives will, more often than not, make you more money than actively managed funds, here is Warren Buffett’s explanation on The Simple Reason Passives Produce Better Results.

What Are Passives?

A passive index fund is mediocre by definition.  It passively tracks the stock market as a whole by buying a little of everything, rather than trying to beat the market by investing in individual companies. 

A Wee Bit Of Passives History

The first index was founded by Charles Dow in 1884.  The Dow Jones Industrial Average, named after his company, simply tracked how shares were doing as a whole.  It meant that pundits and investors could discuss either a percentage or points rise or fall in the stockmarket.

More sophisticated indices followed: the Nikkei, the Hang Seng, the Nasdaq, the FTSE, and most famously the S&P 500.  They were quickly adopted as the way to report business across the world.

In 1974, the world famous economist, Paul Samuelson, took an interest.  His book Economics was not only the best selling text book in America in any subject for 30 years, it also won him an economics Nobel prize.  His idea became know as the Efficient Markets Hypothesis.

When he looked at the data, he discovered that in the long run, most professional investors did not beat the market.  And when their fees were taken into account, the results were embarrassing for the investment industry.  He suggested that since the ‘experts’ seemed unable to beat the market, someone should set up an ‘index fund’ as a passive way for ordinary people to invest in the stockmarket as a whole, without having to pay professional fund managers to fail for them.

That person was John Bogle, who had just founded a company called Vanguard.  Its mission was to provide simple passive mutual funds for ordinary investors, with no fancy stuff and low fees.  Interestingly, the First Index Investment Trust launched in 1976 failed miserably.  Investors didn’t like the idea of a passive fund that was guaranteed to be mediocre.  But Bogle kept the faith and people slowly started to catch on.  The rest, as they say, is history.

Having stayed true to passives for more than 40 years, and having recently introduced a low cost service to the UK, Vanguard is now one of the world’s leading investment firms, with in excess of £3,000,000,000,000 in global assets under management.

The Rise And Rise Of Passives

Here are three recent articles on the subject of passive index investing.  The first explains in layman’s terms why passives are so attractive and why they work.  The second suggests they might soon overtake the amount of money being actively managed.  And as if to confirm the reason for this, the third calculates that UK investors could currently be wasting over £6.7 billion each year in under-performing active funds.

Five Reasons Why You’ll Love Index Investing

Here are five reasons why a more modest seeming vehicle – a portfolio of passive index funds – makes the most sense: passives »

Could Passives Overtake Actives’ Market Share?

Experts have questioned whether passive index investing could eventually dominate over active, as reports warn of big fund houses quickly expanding their foothold in global indices: passives »

Fund Groups Overcharge UK Investors £6.7 Billion A Year

Fund managers could be overcharging British investors as much as £6.7bn each year for expensive supposedly “actively” managed funds that fail to outperform their benchmarks, according to an advice firm: passives »

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