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

• Peter Lynch backs active funds over passive ones, and expects top managers to beat the market.
• In contrast, Warren Buffett recommends low-cost index funds as the best option for most investors.

Legendary investor Peter Lynch bemoaned the rise of passive investing, and predicted the best fund managers would continue beating the market, in a recent interview with Bloomberg Radio's Baystate Business.

"This move to passive is a mistake," Lynch said. "People are missing the boat."

Lynch is best known for generating an annualized return of 29% over 13 years as manager of Fidelity's Magellan fund, and growing its assets under management from $18 million to $14 billion between 1977 and 1990.

The retired investor told Baystate Business fund managers' performance is easily measured. He compared the process of selecting a good fund to seeking out an orthopedist, or heart surgeon in the top quartile of their profession.

"Our fund managers, our active guys, have beaten the hell out of the market for 10, 20, 30 years," Lynch said, highlighting the likes of Will Danoff, whose Contrafund made early bets on Google and Tesla. "They'll keep doing it. Fidelity will continue to beat the market."

Warren Buffett, the famed stock-picker and Berkshire Hathaway CEO, doesn't share Lynch's faith in active managers. Instead, he recommends low-cost index funds for the vast majority of investors, as some active managers charge hefty management and performance fees, and he doesn't believe they can consistently beat the market.

Buffett famously went as far as wagering $1 million that a S&P 500 index fund, over the course of a decade, would outperform a basket of hedge funds after costs, fees, and expenses. He comfortably won the bet at the end of 2017.

While Lynch and Buffett disagree on the merits of active management, the pair are mutual admirers. The Berkshire chief praised the former Fidelity man as a "high-grade guy" at his annual meeting in 2015, and quoted him in his shareholder letters for 1988 and 1993.

Meanwhile, Lynch wrote in Worth magazine in 1997 that Buffett quoting him in an annual letter "was as thrilling to me as getting invited to the White House." The Berkshire boss also helped him realize his greatest mistake was selling winning stocks such as Home Depot and Dunkin' Donuts too early, Lynch wrote in Forbes magazine in 2017.

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