I don't think we are hearing enough about this topic. Although not imminent, there is systematic risk in the relentless 401K bid on the S&P slowing, or reversing, in the next decade. I'm sure the MMT Fed would step in to backstop everyone's retirement, to avoid any type of great depression drawdown.....but still worth staying aware of the potential for disruption.
EDIT- Fake AI letter posted by Mike Green from Simplify....still some good points, but not directly for WB.
An Open Letter on Index Investing, Stewardship, and the Responsibilities of Ownership
By Warren E. Buffett
To Whom It May Concern
Throughout my investing life, I've shared much commentary on how people might navigate the markets with discipline and common sense. Some of those observations have been quoted, misquoted, or taken as endorsements of one style or another. In particular, I've long emphasized the benefits of low-cost index investing for most investors a view I want to revisit today in light of how the investment world has changed and what responsibility now rests on the shoulders of the biggest players in our system.
Let's begin with what hasn't changed.
Why I Supported Indexingand Still Do (for Most)
In 1993, I wrote that "by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals." That remains largely true today. Broad-based indexing remains a sound default for those without the time, skill, or interest to evaluate individual businessesor to choose managers who can. It offers low cost, automatic diversification, and insulation from the twin devils of human emotion and Wall Street salesmanship.
I advised that the capital left to my now-deceased wife, Susan, be allocated 90% to a low-cost S&P 500 index fund and 10% to short-term government bonds when I passed. That was not a declaration of indexing's superiority as a capital allocation mechanism. It was an admission of something else: that bad active management is worse than no active management at all. For most people, indexing offers a kind of shelterfrom lousy advice, high fees, and the temptation to trade.
But indexing was never meant to be the system. It was a safeguard for those who couldn'tor shouldn'ttry to outthink the market. And when that safeguard becomes the system itself, it's worth taking a fresh look.
What's Changed: Scale, Structure, and Stewardship
When I made those statements in the 1990s, indexing was still relatively small. Active managers dominated the marginal dollar that set prices. Index funds were passengersnot driverson the market's journey.
Today, we've crossed the threshold.
Passive funds once niche now control a major chunk of U.S. equity assets. Different analyses peg the share of overall market ownership in the neighborhood of 35-45% if you include quasi-indexing strategies, far beyond anything anticipated a few decades ago.
The three largest index complexesBlackRock, Vanguard, and State Streetcollectively cast a quarter or more of the votes at many large public companies.
Due partly to well-intentioned regulation (including Qualified Default Investment Alternative (QDIA) rules for retirement plans), fiduciaries now overwhelmingly default participant capital into target-date products dominated by passive strategies.
Whichever definition you choose, the days of indexers being purely along for the ride are long gone. They're now in the driver's seat.
The result? Passive managers hold unprecedented sway in corporate Americayet too often shrink from the responsibilities that come with it.
We see this in real-time. One of the largest index providers recently sidestepped regulatory scrutiny not by restructuring its funds, but by using derivatives to maintain economic exposure in certain banks while surrendering its formal voting power. It's perfectly legal, perhaps. But it underscores a moral question: If you own something, shouldn't you act like it?
We don't solve a scale problem by dodging accountability. Indexing was initially created as a marketing tool. The introduction of low-cost passive index funds reduced the costs of accessing investment returns for many investors. But once these funds control large swaths of the economy, it can't claim the luxury of neutrality. You either own the place or you don't.
Price Without a Buyer
As indexing grows, another problem becomes harder to ignore: price discovery falters.
Traditionally, active investors determined stock prices by weighing fundamentals, strategy, and risk. Indexing buys more of what's already there, asking few questions about quality or management. That's fine when index funds are a minority participant and active investors still determine prices. But when a huge share of the market is controlled by investors who buy or sell purely on flows, price ceases to be a reliable reflection of underlying value.
Small or emerging companies can struggle for attention, while larger incumbents can balloon in market cap without necessarily proving their worth. Over time, the feedback loop between good ideas and fresh capital weakens, to everyone's detriment.
Stewardship Without a Steward
I've often said my favorite holding period is forever. That only works if you're a true ownersomeone who digs into the reports, meets the people running the business, and speaks up when trouble brews.
Ownership is not just financial. It's moral. When giant index funds accumulate ownership but keep their distance from the role, we enter an era of what I call ownerless capitalismwhere decision-makers in corporate boardrooms rarely feel the presence of a critical shareholder voice. The system starts to falter.
Some index providers have built "stewardship teams." That's a start. But can a small staff realistically oversee hundreds or thousands of public companies? Or is it all window dressing?
One last note on scale: if you've grown too large to fulfill the basic obligations of ownership, you should consider trimming that ownership, not papering it over with synthetic positions or administrative sleight of hand.
A Word to Fiduciaries
Let me address pension trustees, endowment committees, plan sponsors, and consultants.
I know the pressure you face. Regulation rewards conformity. QDIA rules bless passive default options. Choosing an off-benchmark strategy invites scrutiny and potentially legal risk. It's tempting to treat indexing not only as a sound option but as the only option.
But that abdicates the real job of capital allocation. Instead of putting money to its best use, you're merely "following the money." That's not stewardship. That's liability management disguised as investment strategy.
What Now?
I'm not calling for index fund firms to be broken up yet. They are still an excellent, low-cost solution for most individual investors. But as their market share grows, so does their duty to act like ownersnot only of the companies in which they invest but as stewards of the markets they inhabit.
The power they hold is no small matter. It affects capital formation, competitiveness, and governance. It must be wielded thoughtfully, not evaded. There's no moral high ground in building trillion-dollar stakes while declining to shoulder ownership obligations.
So, I say to the large index providers: You may not have asked for this power, but you've got it. Use it responsibly. Or find someone who will.
To fiduciaries: Think beyond fees and lawsuits. Consider whether your capital is fueling a healthy economy for future beneficiaries. That may mean working with thoughtful, high-conviction managerseven if they don't align neatly with benchmarks.
To investors of all sizes: The first principle of investing isn't diversification or even patience. It's ownership. Be an ownerhonestly and actively. Not just of a stock, but of your role in the system that gives those stocks meaning.
And to our regulators: I'm no fan of heavy-handed edicts.But if these fund giantsnow systemically pivotalwon't take the initiative to manage their scale responsibly, you may have to step in. Common-sense guardrails, or a requirement that firms demonstrate real stewardship and a plan for liquidity shocks, might help avoid a nightmare scenario where outflows spark forced selling, and no one's there to buy. We're not talking about dissolving index funds or punishing everyday investors, but we are talking about ensuring that concentrated ownership doesn't destabilize the system. If it takes a nudgeor even a shovefor them to get serious about the obligations that come with their size, then so be it.
If indexing is to remain a force for good, it must be balanced by real people who engage, evaluate, and occasionally say "no." We still need stewards of capital. Let's not automate them out of existenceor pretend that a handful of colossal index providers don't have real duties to everyone who entrusts them with these assets.
Yours for the long-term,
Warren E. Buffett
Omaha, Nebraska
EDIT- Fake AI letter posted by Mike Green from Simplify....still some good points, but not directly for WB.
An Open Letter on Index Investing, Stewardship, and the Responsibilities of Ownership
By Warren E. Buffett
To Whom It May Concern
Throughout my investing life, I've shared much commentary on how people might navigate the markets with discipline and common sense. Some of those observations have been quoted, misquoted, or taken as endorsements of one style or another. In particular, I've long emphasized the benefits of low-cost index investing for most investors a view I want to revisit today in light of how the investment world has changed and what responsibility now rests on the shoulders of the biggest players in our system.
Let's begin with what hasn't changed.
Why I Supported Indexingand Still Do (for Most)
In 1993, I wrote that "by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals." That remains largely true today. Broad-based indexing remains a sound default for those without the time, skill, or interest to evaluate individual businessesor to choose managers who can. It offers low cost, automatic diversification, and insulation from the twin devils of human emotion and Wall Street salesmanship.
I advised that the capital left to my now-deceased wife, Susan, be allocated 90% to a low-cost S&P 500 index fund and 10% to short-term government bonds when I passed. That was not a declaration of indexing's superiority as a capital allocation mechanism. It was an admission of something else: that bad active management is worse than no active management at all. For most people, indexing offers a kind of shelterfrom lousy advice, high fees, and the temptation to trade.
But indexing was never meant to be the system. It was a safeguard for those who couldn'tor shouldn'ttry to outthink the market. And when that safeguard becomes the system itself, it's worth taking a fresh look.
What's Changed: Scale, Structure, and Stewardship
When I made those statements in the 1990s, indexing was still relatively small. Active managers dominated the marginal dollar that set prices. Index funds were passengersnot driverson the market's journey.
Today, we've crossed the threshold.
Passive funds once niche now control a major chunk of U.S. equity assets. Different analyses peg the share of overall market ownership in the neighborhood of 35-45% if you include quasi-indexing strategies, far beyond anything anticipated a few decades ago.
The three largest index complexesBlackRock, Vanguard, and State Streetcollectively cast a quarter or more of the votes at many large public companies.
Due partly to well-intentioned regulation (including Qualified Default Investment Alternative (QDIA) rules for retirement plans), fiduciaries now overwhelmingly default participant capital into target-date products dominated by passive strategies.
Whichever definition you choose, the days of indexers being purely along for the ride are long gone. They're now in the driver's seat.
The result? Passive managers hold unprecedented sway in corporate Americayet too often shrink from the responsibilities that come with it.
We see this in real-time. One of the largest index providers recently sidestepped regulatory scrutiny not by restructuring its funds, but by using derivatives to maintain economic exposure in certain banks while surrendering its formal voting power. It's perfectly legal, perhaps. But it underscores a moral question: If you own something, shouldn't you act like it?
We don't solve a scale problem by dodging accountability. Indexing was initially created as a marketing tool. The introduction of low-cost passive index funds reduced the costs of accessing investment returns for many investors. But once these funds control large swaths of the economy, it can't claim the luxury of neutrality. You either own the place or you don't.
Price Without a Buyer
As indexing grows, another problem becomes harder to ignore: price discovery falters.
Traditionally, active investors determined stock prices by weighing fundamentals, strategy, and risk. Indexing buys more of what's already there, asking few questions about quality or management. That's fine when index funds are a minority participant and active investors still determine prices. But when a huge share of the market is controlled by investors who buy or sell purely on flows, price ceases to be a reliable reflection of underlying value.
Small or emerging companies can struggle for attention, while larger incumbents can balloon in market cap without necessarily proving their worth. Over time, the feedback loop between good ideas and fresh capital weakens, to everyone's detriment.
Stewardship Without a Steward
I've often said my favorite holding period is forever. That only works if you're a true ownersomeone who digs into the reports, meets the people running the business, and speaks up when trouble brews.
Ownership is not just financial. It's moral. When giant index funds accumulate ownership but keep their distance from the role, we enter an era of what I call ownerless capitalismwhere decision-makers in corporate boardrooms rarely feel the presence of a critical shareholder voice. The system starts to falter.
Some index providers have built "stewardship teams." That's a start. But can a small staff realistically oversee hundreds or thousands of public companies? Or is it all window dressing?
One last note on scale: if you've grown too large to fulfill the basic obligations of ownership, you should consider trimming that ownership, not papering it over with synthetic positions or administrative sleight of hand.
A Word to Fiduciaries
Let me address pension trustees, endowment committees, plan sponsors, and consultants.
I know the pressure you face. Regulation rewards conformity. QDIA rules bless passive default options. Choosing an off-benchmark strategy invites scrutiny and potentially legal risk. It's tempting to treat indexing not only as a sound option but as the only option.
But that abdicates the real job of capital allocation. Instead of putting money to its best use, you're merely "following the money." That's not stewardship. That's liability management disguised as investment strategy.
What Now?
I'm not calling for index fund firms to be broken up yet. They are still an excellent, low-cost solution for most individual investors. But as their market share grows, so does their duty to act like ownersnot only of the companies in which they invest but as stewards of the markets they inhabit.
The power they hold is no small matter. It affects capital formation, competitiveness, and governance. It must be wielded thoughtfully, not evaded. There's no moral high ground in building trillion-dollar stakes while declining to shoulder ownership obligations.
So, I say to the large index providers: You may not have asked for this power, but you've got it. Use it responsibly. Or find someone who will.
To fiduciaries: Think beyond fees and lawsuits. Consider whether your capital is fueling a healthy economy for future beneficiaries. That may mean working with thoughtful, high-conviction managerseven if they don't align neatly with benchmarks.
To investors of all sizes: The first principle of investing isn't diversification or even patience. It's ownership. Be an ownerhonestly and actively. Not just of a stock, but of your role in the system that gives those stocks meaning.
And to our regulators: I'm no fan of heavy-handed edicts.But if these fund giantsnow systemically pivotalwon't take the initiative to manage their scale responsibly, you may have to step in. Common-sense guardrails, or a requirement that firms demonstrate real stewardship and a plan for liquidity shocks, might help avoid a nightmare scenario where outflows spark forced selling, and no one's there to buy. We're not talking about dissolving index funds or punishing everyday investors, but we are talking about ensuring that concentrated ownership doesn't destabilize the system. If it takes a nudgeor even a shovefor them to get serious about the obligations that come with their size, then so be it.
If indexing is to remain a force for good, it must be balanced by real people who engage, evaluate, and occasionally say "no." We still need stewards of capital. Let's not automate them out of existenceor pretend that a handful of colossal index providers don't have real duties to everyone who entrusts them with these assets.
Yours for the long-term,
Warren E. Buffett
Omaha, Nebraska
