Lynch vs Buffett? Fake news!

Peter Lynch vs Warren Buffett. That's a juicy topic for an article on investing. The title of the article, which was published by a business news website that has perfected the art of creating alluring headlines, said "Legendary investor Peter Lynch breaks with Warren Buffett, warning passive investors they're losing out and backing the best fund managers to keep beating the market."

The headline has been picked up by Google news and forwarded and tweeted and retweeted till it had begun to sound like a great controversy had broken out amongst those who track investment-related news on social media. It sounded like some kind of an argument had broken out between the two great investors. Lynch and Buffett had had some grand debate, with Lynch fans in the audience chanting 'active, active, active', and Buffett fans going 'passive, passive, passive.'

Of course, the reality was nowhere near as exciting. All that had happened was that a Boston-based investment podcast had done a brief interview of Peter Lynch about an endownment of US$ 20 million worth of paintings from his private art collection to a museum in Boston College. The interview was almost entirely about paintings and art, and that the 77-year old Lynch now had 10 grandchildren and that he had already done with Christmas presents shopping for his family and so on and so forth.

Somewhere among all this, there was one question about Lynch's opinion on the great switch to passive investing. Lynch answered briefly, saying that investors were 'missing the boat' by switching to passive investing and that the best active managers had a track record that was far ahead. He gave some examples of Fidelity and other fund managers. That's really all he said. There was no mention of Warren Buffett, obviously. So these 'break with Buffett' headlines were just misdirection and fictional clickbait, as far too many headlines nowadays tend to be.

At the bottom of the whole thing, there is the simple fact that Peter Lynch is one of the most successful active fund managers in history - 29% annualised over 13 years while managing the giant Magellan fund. It is notable that Warren Buffett is also, in a very real sense, an active fund manager even though he does not run what is technically an investment fund. Functionally, Berkshire Hathaway is an investment vehicle with Buffett, Munger and a few others as fund managers. It's not structured as a fund but as a public corporation so the only way to invest through this 'fund' is to be a shareholder. Buffett and Munger certainly practice active management in their own investments.

So what about Buffett's pro-passive statements? What he has said repeatedly in the past is that professional fund managers from Wall Street charge too much in costs and deliver lower returns than the broad indexes after expenses. Therefore, it makes sense for investors to just invest in low-cost index funds. This is no doubt true. Peter Lynch's position is that the top fund managers handily outperform the same indexes and do so on a sustainable basis. This is ALSO true. There is no contradiction between the two views. The problem is one of fund selection.

In America, the entire case for passive investing was created by John Bogle with his Vanguard funds and was based on the high cost of actively managed funds. As I've written earlier, a lot of investors who come into equity funds - perhaps most of them - are not interested in earning the same as the index. They want more. That 'more' is hard to find but not impossible and I can say that with confidence because that's what we at Value Research have been doing for decades.

However, depending on your outlook as an investor, there's a case for passive and a case for active but there's little case for the active-pretending-to-be-passive funds that the mutual fund industry seems to be leaning towards. As I wrote in these pages recently, those new 'innovative' funds are a solution to the fund companies' own business problems, not your investment problems.