The purpose of the article is to highlight the cost of ignoring management fees over long periods of time.
The Difference In Fees
Buffett bought Berkshire Hathway during the 1970s for a very cool $16,000,000.
This initial sum grew at a compounded return of roughly 21% over 40 years and Buffett’s net worth currently stands at roughly $72,000,000,000.00.
An enormous amount of money.
Supposing Buffett had invested his money in a ‘magical fund’ earning a 21% return, while paying 1% every year on Net Asset Value, Buffett’s total net worth today would only stand at roughly $32 billion.
So, if he had paid a fund manager, Buffett would have paid 45.83% percentage of Berkshire’s value to fund managers.
Buffett was never going to hand over 1% of his returns every year and you are never going to find a magical fund that earns 21% every year. Nevertheless, this study outlines the benefits which come with a ruthless focus on costs.
As an investor, you should really learn to focus on your costs in order to significantly boost profits. You should also be aware that the chances of out-performing most other investors is incredibly slim. Instead, you should focus on a passive investing strategy by creating a lazy stock portfolio and investing in index funds.
Note: in order to make this calculation easier and avoid the complex calculation of dividend tax payments over time, we used an initial sum of $5,000,000, rather than 16,000,000. This does not affect the role that a 1% fee plays over this period. All growth figures have been taken from Berkshires annual letters.