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Betting on (and with) Buffett

Had you bet on Buffett back in 1965, you would’ve made 11% more than the S&P 500, compounded annually and including all dividends from those companies that issued one. Of course, back then no one knew that Warren Buffett was going to go on to build one of the most successful companies in the world, so placing a bet on him would’ve been akin to finding a needle in a haystack, except finding The Oracle would’ve paid vast sums more than finding the needle.

Berkshire Hathaway, the company Buffett built from essentially the ground up, had a gain in net worth in 2017 of $65 billion. That’s a staggering figure for merely one year of performance. Buffett himself admits that only $36 billion came from operations, with the remainder being delivered via a change in the tax code, but nevertheless it’s still a formidable statistic. Investors yearn for the next great investment manager who can deliver outsized returns on a consistent basis like Warren has done for decades; many even attempt to match the returns he has realized over the years by actively buying, selling, trading, and managing investments on behalf of others. But the failure rate is so high, that the average investor is almost better off sticking with Buffett’s sage advice and buying a simple index fund and holding it long term.

The bet

We’ve discussed the decade-long bet before in our writings, but the final results are in and the million-dollar prize money has been awarded to Buffett, who took the side of the passively managed S&P 500 index fund. Protégé Partners was attempting to debunk Buffett’s conviction – and the market in general – that it could pick funds (and fund managers in particular) that could outperform a low-cost index fund. What’s more, they could pick any fund at any time during the ten years, while Buffett was limited to just one fund for the duration of the bet.

Protégé chose 5 “fund of funds”, which in turn owned interests in 200+ hedge funds. In essence, Protégé could pick “the best of the best” money managers in the world at the time (from 2007 to 2017) and they must have been oozing with confidence after the first year, when they lost less money in each of the funds (the worst performing fund losing 30%, the best fund losing 16.5%) than the S&P 500 that year, which lost a whopping 37%. Obviously, Buffett knew there would probably be a reversion to the mean shortly after the first year of losses, and that’s exactly what happened.

The chart below shows just how outmatched stock pickers were to a “do nothing” strategy that your average superstar money manager would most likely scoff at lest their life’s work be exposed as meaningless.1

The lessons

Final gains for the actively managed fund ranged from a mere 2.8% to a respectable 88%. The S&P 500 returned 125.8% over the period. Doing less with your investments would’ve been more rewarding than trying to time the market, buy low and sell high, or pay someone exorbitant fees to manage your money for you. The fees were the straw that most likely broke the camel’s back on this bet. Buffett reported in his annual letter – a wealth of knowledge in and of itself – that the fund of funds averaged 250 basis points (2.5%), making it a lucrative endeavor for the manager, often at the very literal expense of the investor. In contrast, the index fund’s fee usually ranges from 10 to 20 basis points, and sometimes even lower.

Performance is always impacted by fees because the investor is guaranteed to lose by the amount he or she pays in fees, but there’s never a guarantee that anyone is going to match or beat the market as a whole. We’ll end with a very telling statement from Warren in that very same annual letter: “Performance comes, performance goes. Fees never falter.” Simple is best, bet with Buffett when it comes to your hard-earned savings.


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