Friday, 3 March 2017

Warren Buffett's Big Bet

Warren Buffett has long been an advocate for index funds saying that for the average person, this is the best way for them to invest.

Well, in 2005's Berkshire Hathaway's annual report, Mr Buffett argued that active management in aggregate would over a period of time under perform the market index. Mr Buffett eventually followed it up wagering $500,000 that this would be the case (the winnings of which would go to charity).

It took some time, but eventually the bet was taken by Ted Seides. As part of the arrangement, Mr Seides selected 5 fund of fund hedge funds to be pitted against Mr Buffett seemingly amateurish selection of a run of the mill index fund.

The bet started at the beginning of 2008, so at the end of 2016, we had seen 9 out of the 10 years completed. There is 1 to go.

The results so far?

Let's just say, Warren Buffett's selected charity, Girls Inc. of Omaha, might want to plan what they might be able to do with $500,000.

After 9 years the growth of the index fund has been 85.4% (in total, not per annum), where as the best performing of the 5 hedged funds has returned 62.8% and the worst 2.9% - an average of 22.04% between the 5 funds. Just staggering. This selection of 5 funds coming from a co-manager of a major asset manager who has the financial resources and confidence to bet $500,000 on it.

But, the fact he has $500,000 to place on the bet is probably a good indication of the level of fees being charged by these managers and as academics can show, there is an extremely high correlation between higher fees and under performance.

For those who are interested, the information can be found in the Berkshire Hathaway's letter to shareholders for 2016 http://www.berkshirehathaway.com/letters/2016ltr.pdf starting on page 21.

Glenn Hilber is a Certified Financial Planner with over 9 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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