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The Dirty Little Secret About Warren Buffet’s Bet With A Hedge Fund Manager

J. Patrick Collins Jr., CFP®, EA

By now you may have heard that Warren Buffet made a bet with a hedge fund manager that just ended.  The bet was pretty simple.  Put up $1 million and pick the best investment for a 10 year period (bet started on 1/1/2008).  The winner would give the $1 million to the charity of their choice.  Warren Buffet’s pick was simple- the Vanguard S&P 500 Index Fund.  The hedge fund manager went with a blend of 5 fund-of-funds (basically a group of hedge funds). The bet didn’t start off great for The Oracle of Omaha as he explained in his annual letter:

The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.

The end result wasn’t even close.  The S&P returned a cumulative 125.5% while my calculations show the hedge funds earned 36.3% over the same period.  Warren Buffet practiced what he preached in many of his shareholder letters.  Avoid high cost funds, most investors should diversify in index funds, and buy and hold for the long-term.

Now, here is the dirty little secret.  Warren Buffet could have made more money for his shareholders if he had followed his own advice. It turns out over that same 10 year period Berkshire Hathaway, the company managed by Warren Buffet, also underperformed the S&P 500!  Berkshire Hathaway generated a 7.7% annualized return during the 10 year period ending December 31st 2017 while the S&P 500 earned an 8.5% annualized return during that same period.

The point of this article is not to call out Warren Buffet.  As I wrote in a previous article about challenging Warren Buffet:

There are many lessons that can be learned from this bet.  Probably the biggest one is that if you ever have the opportunity to wager $1 million with the greatest investor of all-time, you should probably pass.

The lesson for all of us to remember continues to be how hard it is to beat the market by picking great stocks or funds.  Warren Buffet, who is widely considered to be the best investor of all time couldn’t do it over the last 10 years.  If he can’t, what is the chance that you, or your advisor can?