Terry Smith Explains The “Busy Fool Syndrome”

Johnny HopkinsActive Investing1 Comment

In his book – Investing for Growth, Terry Smith argues that most fund managers prioritize matching their benchmark rather than outperforming it, leading them to become “index huggers” who underperform after fees.

He supports Warren Buffett and John Bogle’s view that low-cost index funds are better for most investors. Smith explains that “active” fund management doesn’t mean frequent trading but rather not strictly following an index.

Successful investors like Buffett minimize trading to reduce costs and improve returns. He highlights that fees should reflect performance rather than activity, cautioning against the “busy fool syndrome” where frequent trading results in poor returns.

Here’s an excerpt from the book:

The majority of fund managers do not see the biggest threat to their career as underperforming their benchmark but in differing from that benchmark and their peers. As a result, they become “index huggers” who own enough shares in whatever market index is used for their performance benchmark to make sure their performance more or less matches it.

But that, of course, is before fees and other costs such as dealing. The inevitable result is that the majority of active fund managers underperform the index.

I agree with Warren Buffett and John Bogle (the founder of Vanguard, one of the world’s largest index fund providers) that most investors would be better served investing in a low-cost tracker fund, which charges a lot less than the “active” managers who are simply index hugging.

One of the problems for outsiders trying to understand fund management is that words are often used in ways that differ from their common meaning. Take the word “active.” It doesn’t denote that the manager of an active fund engages in a lot of dealing activity—rather, it is meant to distinguish those managers who manage funds which are not strictly index trackers.

Some of the finest fund managers, such as Warren Buffett, eschew index hugging and run active funds—but also avoid dealing activity as much as possible, as dealing adds to the costs of managing money and so detracts from funds’ performance. As Buffett says, “The stock market is designed to transfer money from the active to the patient.”

This also confuses people who ask, “If the fund manager doesn’t deal much, what am I paying fees for?” The answer is that the fees are payment for the outcome—the performance. Look at it this way: would you be happy paying fees to a manager who dealt a lot but delivered poor performance—or, as it is known, “busy fool syndrome?” I doubt it.

You can find more articles on Terry Smith here:

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One Comment on “Terry Smith Explains The “Busy Fool Syndrome””

  1. Is this the same Terry Smith that has underperformed his benchmark over 1,2,3,4,5,6 years. Over 6 years he is almost 30% behind the index and has charged 1% a year for that privilege….

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