The Oracle of Omaha, the legendary billionaire investor Warren Buffett is undoubtedly the greatest investor of all time. Buffett is the brains behind one of the worlds largest and most notable investment firms - Berkshire Hathaway.

To give you an idea of how insanely successful Buffett is, Berkshire has returned 2,744,062% to shareholders between inception in 1964 and 2019 [1]. Yes, you read that correctly. Berkshire has returned almost 3 million PERCENT to shareholders! Their comparable benchmark, the S&P 500, has returned 19,784% to investors during the same time, which in itself, is an impressive return.

A £10,000 investment in Berkshire in 1964 is worth £274,406,200 (£274.4 million) today, while the same investment in an S&P 500 fund would be worth £1,978,400 today. Berkshire's results are even more impressive, because those returns are post-tax, compared to the pre-tax returns for the S&P 500.

If anyone has a thing or two to teach us about investing, it’s Buffett, whose trades moves the market.


Warren Buffett's Bet With a Group of Hedge Fund Managers

A bet Buffett wagered with a group of hedge fund managers within Berkshire’s 2005 annual report, caught my attention.

In Berkshire’s 2005 annual report, Buffett argued that active investment management by professionals (in aggregate) would over a period of years underperform the returns achieved by rank amateurs who sat still and did nothing with their investments. That is those who remain passively invested in and plain and simple S&P 500 tracker fund, with negligible fees.

He explained that the massive fees levied by a variety of “helpers” [fund managers] would leave their clients (again in aggregate) worse off than if the amateurs invested in an unmanaged low-cost, passive index fund (see article).

In true Buffett style, he put his money where his mouth was. He publicly offered to wager $500,000 that no investment professionals could select a set of at least five hedge funds (popular, high-fee investing vehicles) that would match the performance of an unmanaged S&P-500 index fund (charging only token fees) over an extended period of time.

He suggested a ten-year bet, supporting Vanguard’s low-cost S&P fund.

Buffett had expected to have been inundated with offers from fund managers to defend their occupation. He was surprised at the lack of fund managers taking him up on the bet and quipped “after all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?”. After several months of waiting, and waiting, Buffett finally found a fund manager (Ted Seides) to take him up on the other side of the bet.

Nine years into the bet, the compounded annual increase for the index fund was 7.1%, compared to the hedge fund’s annually compounded return of 2.2%. To put this into numbers, $1 million invested in those funds would have gained $220,000 compared to a gain of $854,000 for the index fund.

After ten years, the final average annual gain for the S&P 500 Index Fund chosen by buffet ended up at 8.5%, with a total gain of 125.8%. The S&P 500 achieved this gain, despite the ‘08/’09 financial crash in the first year of the bet, which took several years for the US economy to recover. The final results are shown in the table below.

Source: Berkshire Hathaway 2017 Annual Report [3]

The S&P 500 beat every single one of the hedge funds, and it wasn’t even close. Fund D, the worst-performing fund, was liquidated by its managers in 2017.

The total investment gains of $2,222,279 were donated to Girls Inc. of Omaha, far exceeding the $1m they had been expecting to donate.

Buffett went on to say “in my opinion, the disappointing results for hedge-fund investors that this bet exposed are almost certain to recur in the future.” Berkshire’s 2016 [2] and 2017 [3] annual report contains the full details of this bet.

I’ve already explained why a passive investing strategy makes the most sense for everyday investors in a two-part post that I’ve already written on the topic.

Part 1: An Introduction to Passive Investing (see article).
Part 2: The Globally Diversified Index Fund (see article).


Footnotes

[1] Berkshire 2019 Annual Report
[2] Berkshire 2016 Annual Report
[3] Berkshire 2017 Annual Report


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