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A debate has been raging in the world of investing about the best way to invest: active versus passive. This debate is vital, as the disparity in fees between the two disciplines can climb to a substantial amount over the lifetime of an investor. However, while this debate is important, it has been conducted through an obscure one-dimensional prism—measuring merely “nominal returns.” It’s a classical apples-to-oranges comparison.

In Warren Buffett’s annual Berkshire Hathaway shareholder letter, the sage investor said, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.” I could not agree more. However, Buffett and I have two completely different viewpoints of the process by which this conclusion is reached... Read more