Tuesday, March 03, 2015

Warren Buffett Bet

I was reading yesterday about the famous Warren Buffett bet.  This was a $1 million bet between Buffett and Ted Seides, a hedge fund manager. It was made in 2008 and Buffett wagered that a simple S&P index fund would outperform, over a ten year period, a portfolio of hedge funds.

Even with a 40% drop in the index the first year, it is a stomp. Buffett's approach is up 63% versus a paltry 20% for the hedge funds. A big part of the differential is fees. Hedge funds have a lot more frictional costs than a simple index. The hedge funds, x fees are up 44%. So still trailing.

Now for the irony. The bet was for $1 million. It seems the $1 million was put aside at the very beginning and was earmarked for the charity Girls Incorporated of Omaha.  There was discussion at the outset what to do with the $1 million. It was decided to put into into zero coupon treasury bonds. Even they have beaten the hedge funds!  The $1 million is now worth $1.5 million (I do think they recently took out of zero coupons).

You hear buy and hold is dead. You see people frantically trading and wonder if you would do better. But it appears that my comment, "Step Away from the Batter" does hold true. Just as you can stir pancake batter too much and make the pancakes tougher (appropriate today as it is National Pancake Day), you can also trade too much and be your own worst enemy.


John Carney said...


I have said it before. When you Google the number of funds that win over the index over 10 years you get very few fund managers. If they could the money would come in so fast and the fund would be so large as to stop the out performance. I not talking about hedge funds but all managed funds.

My reason for being excited about Simple Formula is it has a whole lot of history and is working in real time on paper and with real money!

ChrisO said...

We have all heard how hard it is for fund managers to beat the indexes, and it is so true, but I have an even better reason why I will pick an index fund over a fund that is trying to beat the indexes (active manager).

Not only is the list of the funds/managers that have beat index funds small, I would have to some how pick them. And I would have to do that for each sector I want to be in.

I know for a fact that I can't do that. It really isn't just as easy to run a search on Google. First off just because a person beat in the last 10 years doesn't mean they will repeat it for the next 10 years. But on top of that the world doesn't stand still. The manager might quit at any time, and you need to find another. The manager might have been more active and slowly turned it over most of the control over to other people. The fund could start out small where the manager's expertise made a lot of difference, but then go popular, and grew to a size that it is basically an index fund with high fees.

Bottom line for me is that I feel better at trying to learn how to invest, then trying to learn on how to pick the people that will win the lottery of beating the indexes.