‘Are you smarter than Warren Buffett?’: LA man attacks David Ramsey for recommending actively managed funds

‘Are you smarter than Warren Buffett?’: LA man attacks David Ramsey for recommending actively managed funds
‘Are you smarter than Warren Buffett?’: LA man attacks David Ramsey for recommending actively managed funds

A debate of active versus passive investing arose on an episode of “The Ramsey Show” when a caller accused host David Ramsey of misguiding investors. Chris from Los Angeles, California wasn’t pleased with Ramsey recommending actively managed mutual funds.

Seemingly uninterested in being civil, the 35-year-old began the conversation by saying he finds the financial expert “stupid and arrogant” in some ways.

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He said, “My first question would be, ‘Are you smarter than Warren Buffett?' You push people into actively managed funds when over time if you push people into an index fund they would have about 50% more money when they [retire].”

Regardless of his tone, Chris’ thesis is backed up by some data.

Active versus passive

Billioknaire investor Warren Buffett has been a vocal advocate for passive investment strategies. He has previously recommended low-cost index funds for average investors and said that 90% of his wife’s inheritance will be deployed in such funds when he passes.

Studies indicate that over long periods, actively managed funds tend to underperform low-cost passive funds that simply track broad indexes. According to the S&P Dow Jones Indices’ scorecard, only 12.02% of all U.S. large-cap actively managed funds outperformed the S&P 500 benchmark index over the 15 years up to the end of 2023.

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However, many investors believe they can spot those rare mutual funds that will outperform the index over extended timelines. Ramsey apparently counts himself as one of them.

He conceded that index funds are "wonderful" but rejected Chris' claim that an investor would earn 50% more in an index fund than actively managed funds, "unless you're an absolute idiot" in picking active funds.

Chris argued that even when actively managed funds outperform index funds, the higher costs associated with active management lower your returns by 2%.