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Warren Buffett declares victory in 10-year bet of Index Fund against Hedge Fund

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  • Warren Buffett declares victory in 10-year bet of Index Fund against Hedge Fund

    A great gem in the 2016 BK letter.  The bet can be seen here:http://longbets.org/362/

    Here is a link to the full letter: http://www.berkshirehathaway.com/2016ar/2016ar.pdf

    My curated sections of interest:

    "In this section, you will encounter, early on, the story of an investment bet I made nine years ago and, next, some strong opinions I have about investing. As a starter, though, I want to briefly describe Long Bets, a unique establishment that played a role in the bet. Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website. When the bet is concluded, Long Bets pays off the winning charity.

    ...

    Now, to my bet and its history. In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

    ...

    What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.

    ...

    For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager.

    ...

    The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time. That’s an important fact: A particularly weak nine years for the market over the lifetime of this bet would have probably helped the relative performance of the hedge funds, because many hold large “short” positions. Conversely, nine years of exceptionally high returns from stocks would have provided a tailwind for index funds. Instead we operated in what I would call a “neutral” environment. In it, the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually.

    That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000."

    The rest of the section/letter is a great read. I couldn't find a way to embed images in this post (took a nice screen shot of the table of returns of the hedge fund vs index fund) but I thought this would be a fun read on a lazy/slow weekend.



     

  • #2
    How have proponents of active management responded to the results of this bet? There is always an excuse... I wonder what their take is. Also, I wonder what Ted Seides had to gain from participating in this challenge - seems like he (and "active management") had more to lose than gain. The results weren't even close!

    Comment


    • #3
      the usual excuse is the s&p is not a fair index.

      good for the girls assoc of omaha!

      Comment


      • #4
        If Warren Buffet is so much into Index funds, how come he is not practicing what he is preaching but is an active investor like the one he decries.

        Comment


        • #5




          If Warren Buffet is so much into Index funds, how come he is not practicing what he is preaching but is an active investor like the one he decries.
          Click to expand...


          A familiar case of "Do as I say, not as I do"

          Comment


          • #6







            If Warren Buffet is so much into Index funds, how come he is not practicing what he is preaching but is an active investor like the one he decries.
            Click to expand…


            A familiar case of “Do as I say, not as I do” ?
            Click to expand...


            Have you studied Buffett? If only we really could do as he does... He devotes his life to the hands-on study and management of the businesses he owns. He was born to do what he does. He is as much business owner as investor. Very different from the typical "active" investor, even at the hedge fund management level, most famously demonstrated by the implosion of LTCM in 2000.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7


              Have you studied Buffett? If only we really could do as he does… He devotes his life to the hands-on study and management of the businesses he owns. He was born to do what he does. He is as much business owner as investor. Very different from the typical “active” investor, even at the hedge fund management level, most famously demonstrated by the implosion of LTCM in 2000.
              Click to expand...


              That may be so but before his companies got too big he used to buy stocks in companies like Coca Cola, Heinz etc. And he still buys other established companies like Burlington Northern Santa Fe whose future may be not better than the same amount invested in S & P 500.

              In life one can take calculated risks. and the rewards are good. I have taken those in commercial real estate to get good sized gains. Heck, even WCI owner has taken risk with 1500 potential working in ER hours at $300 a pop not being invested in S & P 500 but instead in a uncertain web site called WCI that may have imploded like a hedge fund, but instead has soared like an eagle.

              Comment


              • #8





                Have you studied Buffett? If only we really could do as he does… He devotes his life to the hands-on study and management of the businesses he owns. He was born to do what he does. He is as much business owner as investor. Very different from the typical “active” investor, even at the hedge fund management level, most famously demonstrated by the implosion of LTCM in 2000. 
                Click to expand…


                That may be so but before his companies got too big he used to buy stocks in companies like Coca Cola, Heinz etc. And he still buys other established companies like Burlington Northern Santa Fe whose future may be not better than the same amount invested in S & P 500.

                In life one can take calculated risks. and the rewards are good. I have taken those in commercial real estate to get good sized gains. Heck, even WCI owner has taken risk with 1500 potential working in ER hours at $300 a pop not being invested in S & P 500 but instead in a uncertain web site called WCI that may have imploded like a hedge fund, but instead has soared like an eagle.
                Click to expand...


                His big edge in this manner were the fees, this is where it made it hard to win, well that and the fact it was a fund of funds that probably acted a lot like an index with horrendous fees. You cant have fees of the 60-80s without the concomitant growth part of the equation. It used to be peanuts in comparison but now its significant. Buffett isnt an idiot and saw that as too steep to be able to be beat easily.

                When he buys other companies common stock he is doing so using the float of his insurance company which essentially means its leverage/margin, internally but the principle is the same. He has no need to even get market returns in the short term, he is looking for steady solid cash flowing companies that make the float trade off excellent longer term in accordance with the payout risk time line. Those are probably simple calculations and he is far ahead just in dividends now, more than covering the initial purchase. Thats all helped by having a longer time frame and matching that to his liability, etc...

                Comment


                • #9
                  @kamban and @zaphod

                  We are the very few my friends (ahem, pardon the disrespect coming from the lowly resident). Problem is MDs want a straight forward way. A guide. That is what this website is. Invest in index fund and yes most assuredly you will do well. Everyone has different "do well" definition. Honestly, this whole thing about "hey become a millionaire" is OK but nothing special because lets face it, just having a million is nothing anymore.

                  Overall point being, Kamban knows how Patels work - how many of them are investing in index funds? I am guessing less than 10%. Yet they are killing it. How? Are they dumb? Nope. Neither is WCI for doing this gig. They are sharp and the risk an average indexer thinks is NOTHING to them. Which is correct: in their hands its a great investment.

                  Index funds are a great way to build wealth but lets not discount the fact that calculated risks DO get you amazing results/returns.

                  That word Calculated is synonymous to scam/dumb luck etc etc here and boglehead which is a shame. I believe the reason is because it deviates from a known pathway to achieve wealth. So what? doesn't make it stupid.

                  People aren't born a buffet. You CAN become good at business/risk taking.

                  So conclusion: Both ways are good. Mostly why take risks if you can just chug along with market returns (which has been on a tear lately).

                  Comment


                  • #10




                    @kamban and @zaphod

                    We are the very few my friends (ahem, pardon the disrespect coming from the lowly resident). Problem is MDs want a straight forward way. A guide. That is what this website is. Invest in index fund and yes most assuredly you will do well. Everyone has different “do well” definition. Honestly, this whole thing about “hey become a millionaire” is OK but nothing special because lets face it, just having a million is nothing anymore.

                    Overall point being, Kamban knows how Patels work – how many of them are investing in index funds? I am guessing less than 10%. Yet they are killing it. How? Are they dumb? Nope. Neither is WCI for doing this gig. They are sharp and the risk an average indexer thinks is NOTHING to them. Which is correct: in their hands its a great investment.

                    Index funds are a great way to build wealth but lets not discount the fact that calculated risks DO get you amazing results/returns.

                    That word Calculated is synonymous to scam/dumb luck etc etc here and boglehead which is a shame. I believe the reason is because it deviates from a known pathway to achieve wealth. So what? doesn’t make it stupid.

                    People aren’t born a buffet. You CAN become good at business/risk taking.

                    So conclusion: Both ways are good. Mostly why take risks if you can just chug along with market returns (which has been on a tear lately).
                    Click to expand...


                    I doubt WCI or Bogleheads are full-stop against other types of "active investing" such as blogs or small business or real-estate. Buffett does not say that at all and neither does WCI nor I, a full proponent of the index investing for the average consumer. Bogleheads philosophy is pro-index funds rather than anti-everything non-index. There are plenty of real-estate and bloggers on Bogleheads forum. The active skill in this setting is specifically talking about these hedge/active funds....not small business types like a blog or real-estate.

                    I myself am looking to learn more about real-estate and also I have some small business ideas bouncing around in my head that I will explore.

                    It is obviously clear that there are investment options that are attractive and can leverage great tax/cash-flow advantages (blogs, real-estate, etc.).

                    Buffett is specifically against the active managed mutual funds and hedge funds which purportedly to do better than index but has time and time again fail to do on an aggregate basis.

                    Buffett also acknowledges that there ARE individual funds/managers who CAN beat indexes, himself being one along with other well known names. But as he illustrates in his letter, if you line up a 1000 monkeys and have then pick stocks, 1 will probably bound to have a portfolio that can beat an index in the next 5/10/20 years....but you wouldn't find people lining up behind that monkey and choosing it. The choice to find that super star is difficult for the average lay public.

                    It is misleading to say "Both ways are good." When the definition of these "ways" are vastly different IMO.

                    Blogs/real-estate started by an individual can likely be categorized under "active investing" if one wants to really get into the semantics but it is not equivalent to hedge funds/active funds which is what Buffett and WCI and Bogleheads agree on.

                    Comment


                    • #11
                      @ginmqi

                      you sure about that? Not certain I got that vibe. WCI is still better than boglehead. I randomly posted something about entrepreneurship on boglehead and was pooh poohed. Since then haven't returned.

                      Non-index shaming is real.

                      And these options are "clear" to you, but not to 99% of index investors or else they'd be looking into it. That is the point.

                      And blogging and RE are not "likely categorized as active investing" it IS active investing. Sorry but its not just about hedge funds. The focus of many blogs is index and everything else is inferior.

                       

                      Comment


                      • #12







                        Have you studied Buffett? If only we really could do as he does… He devotes his life to the hands-on study and management of the businesses he owns. He was born to do what he does. He is as much business owner as investor. Very different from the typical “active” investor, even at the hedge fund management level, most famously demonstrated by the implosion of LTCM in 2000.
                        Click to expand…


                        That may be so but before his companies got too big he used to buy stocks in companies like Coca Cola, Heinz etc. And he still buys other established companies like Burlington Northern Santa Fe whose future may be not better than the same amount invested in S & P 500.

                        In life one can take calculated risks. and the rewards are good. I have taken those in commercial real estate to get good sized gains. Heck, even WCI owner has taken risk with 1500 potential working in ER hours at $300 a pop not being invested in S & P 500 but instead in a uncertain web site called WCI that may have imploded like a hedge fund, but instead has soared like an eagle.
                        Click to expand...


                        Bogleheads/Buffett/WCI should be looked at as more pro-index funds than anti everything else.

                        This does NOT mean they are COMPLETELY 100% against ANYTHING that's non-index funds. Obviously, as I stated above, I myself am looking to see about more cash-flow type and higher risk investments such as real-estate and potential small business ideas. And Buffett/WCI/Bogleheads does not preach against anything non-index...Buffett/WCI needs no explanation, and there are plenty of Bogleheads who do real estate investing as well.

                         

                        edit: as noted by a fellow resident above...I probably shouldn't speak for all Bogleheads....it seems they could be more anti non-index than I thought.....

                         

                        Comment


                        • #13







                          @kamban and @zaphod

                          We are the very few my friends (ahem, pardon the disrespect coming from the lowly resident). Problem is MDs want a straight forward way. A guide. That is what this website is. Invest in index fund and yes most assuredly you will do well. Everyone has different “do well” definition. Honestly, this whole thing about “hey become a millionaire” is OK but nothing special because lets face it, just having a million is nothing anymore.

                          Overall point being, Kamban knows how Patels work – how many of them are investing in index funds? I am guessing less than 10%. Yet they are killing it. How? Are they dumb? Nope. Neither is WCI for doing this gig. They are sharp and the risk an average indexer thinks is NOTHING to them. Which is correct: in their hands its a great investment.

                          Index funds are a great way to build wealth but lets not discount the fact that calculated risks DO get you amazing results/returns.

                          That word Calculated is synonymous to scam/dumb luck etc etc here and boglehead which is a shame. I believe the reason is because it deviates from a known pathway to achieve wealth. So what? doesn’t make it stupid.

                          People aren’t born a buffet. You CAN become good at business/risk taking.

                          So conclusion: Both ways are good. Mostly why take risks if you can just chug along with market returns (which has been on a tear lately).
                          Click to expand…


                          I doubt WCI or Bogleheads are full-stop against other types of “active investing” such as blogs or small business or real-estate.

                          Buffett does not say that at all and neither does WCI nor I, a full proponent of the index investing for the average consumer.

                          It is obviously clear that there are investment options that are attractive and can leverage great tax/cash-flow advantages (blogs, real-estate, etc.).

                          Buffett is specifically against the active managed mutual funds and hedge funds which purportedly to do better than index but has time and time again fail to do on an aggregate basis.

                          Buffett also acknowledges that there ARE individual funds/managers who CAN beat indexes, himself being one along with other well known names. But as he illustrates in his letter, if you line up a 1000 monkeys and have then pick stocks, 1 will probably bound to have a portfolio that can beat an index in the next 5/10/20 years….but you wouldn’t find people lining up behind that monkey and choosing it. The choice to find that super star is difficult for the average lay public.

                          It is misleading to say “Both ways are good.” When the definition of these “ways” are vastly different IMO.

                          Blogs/real-estate started by an individual can likely be categorized under “active investing” if one wants to really get into the semantics but it is not equivalent to hedge funds/active funds which is what Buffett and WCI and Bogleheads agree on.
                          Click to expand...


                          The difference is entrepreneurship and not 'active' investing per se. I believe that WCI has mentioned prior that the bogleheads forum does generally frown upon that, and is more frugal and steady investing than risk taking in business ventures. Thats totally fine, its just their level of acceptable risk.

                          Comment


                          • #14




                            @ginmqi

                            you sure about that? Not certain I got that vibe. WCI is still better than boglehead. I randomly posted something about entrepreneurship on boglehead and was pooh poohed. Since then haven’t returned.

                            Non-index shaming is real.

                            And these options are “clear” to you, but not to 99% of index investors or else they’d be looking into it. That is the point.
                            Click to expand...


                            Interesting. I have not posted to Bogleheads recently but given your experience I will defer to data presented, however small/skewed, and I retract my characterization of Bogleheads as a whole. It may be that they are fiercely pro-indexing to the point of casting aside all other types of investments.

                            If that is the case then I will distance myself from that sect of Bogleheads. But to me though it is clear that Buffett and WCI have a large dose of Boglehead but still is not completely anti other types of investments which is clear.

                            It would be interesting to get a survey or index investors and their opinion on non-hedge/active fund types of investing (real estate, blogs/small businesses, etc.). I'm not sure if its as high as 99% but I hope people are not so close minded as to only invest in index funds.

                            But if one has no type/energy/want to do other work/risks...then surely a lifetime of index fund investing isn't a bad way to go either.

                            Comment


                            • #15










                              @kamban and @zaphod

                              We are the very few my friends (ahem, pardon the disrespect coming from the lowly resident). Problem is MDs want a straight forward way. A guide. That is what this website is. Invest in index fund and yes most assuredly you will do well. Everyone has different “do well” definition. Honestly, this whole thing about “hey become a millionaire” is OK but nothing special because lets face it, just having a million is nothing anymore.

                              Overall point being, Kamban knows how Patels work – how many of them are investing in index funds? I am guessing less than 10%. Yet they are killing it. How? Are they dumb? Nope. Neither is WCI for doing this gig. They are sharp and the risk an average indexer thinks is NOTHING to them. Which is correct: in their hands its a great investment.

                              Index funds are a great way to build wealth but lets not discount the fact that calculated risks DO get you amazing results/returns.

                              That word Calculated is synonymous to scam/dumb luck etc etc here and boglehead which is a shame. I believe the reason is because it deviates from a known pathway to achieve wealth. So what? doesn’t make it stupid.

                              People aren’t born a buffet. You CAN become good at business/risk taking.

                              So conclusion: Both ways are good. Mostly why take risks if you can just chug along with market returns (which has been on a tear lately).
                              Click to expand…


                              I doubt WCI or Bogleheads are full-stop against other types of “active investing” such as blogs or small business or real-estate.

                              Buffett does not say that at all and neither does WCI nor I, a full proponent of the index investing for the average consumer.

                              It is obviously clear that there are investment options that are attractive and can leverage great tax/cash-flow advantages (blogs, real-estate, etc.).

                              Buffett is specifically against the active managed mutual funds and hedge funds which purportedly to do better than index but has time and time again fail to do on an aggregate basis.

                              Buffett also acknowledges that there ARE individual funds/managers who CAN beat indexes, himself being one along with other well known names. But as he illustrates in his letter, if you line up a 1000 monkeys and have then pick stocks, 1 will probably bound to have a portfolio that can beat an index in the next 5/10/20 years….but you wouldn’t find people lining up behind that monkey and choosing it. The choice to find that super star is difficult for the average lay public.

                              It is misleading to say “Both ways are good.” When the definition of these “ways” are vastly different IMO.

                              Blogs/real-estate started by an individual can likely be categorized under “active investing” if one wants to really get into the semantics but it is not equivalent to hedge funds/active funds which is what Buffett and WCI and Bogleheads agree on.
                              Click to expand…


                              The difference is entrepreneurship and not ‘active’ investing per se. I believe that WCI has mentioned prior that the bogleheads forum does generally frown upon that, and is more frugal and steady investing than risk taking in business ventures. Thats totally fine, its just their level of acceptable risk.
                              Click to expand...


                              Yeah that seems to be the case from the other poster here. It appears Bogleheads are quite fierce in defending the superiority of indexing above all others, given their view of risk/benefit analysis.

                              Which I agree with you as well...if in their view it is too risky to do other things like real-estate or blogs then to them it's appropriate money.

                              Certainly, you can do worse than just a lifetime investing in index funds....as reports have shown that in aggregate, the average public returns LESS then indexes. And of course many probably have fallen trap into myriad of get-rich quick schemes and real estate flipping workshops.....

                              Comment

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