3 Lessons From Buffett’s Million-Dollar Wager

Photo (cc) by Fortune Live Media

What happens when a specialized hedge fund company accepts a million-dollar bet from a value-investing legend?

It’s not pretty for the hedge fund industry — at least not in the case of the 10-year bet that New York’s Protege Partners accepted from Berkshire Hathaway CEO Warren Buffett in 2008.

Last year marked only the second time in eight years that hedge funds chosen by Protege Partners beat the mutual fund chosen by Buffett — and they just barely did so, according to Fortune magazine, which has exclusively reported on the bet each year since 2008:

Even so, the winning margin was slight. The five funds, on the average, gained 1.7% during 2015 vs. the 1.36% return rung up by Buffett’s index fund.

So what does this have to do with the average investor? Let’s start at the beginning.

Here’s Buffett’s original challenge, as detailed by the Long Now Foundation, which is holding each side’s money (which will go to a charity chosen by the winner):

Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the Standard & Poor’s 500 stock market index (S&P 500) will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.

Buffett chose the Vanguard 500 Index Fund, which is a type of stock mutual fund known as an index fund. Index funds are not actively managed and therefore have low fees. An index fund is simply a basket of stocks designed to track the returns of the stocks of the 500 large American companies that comprise the S&P 500.

Money Talks News founder Stacy Johnson, who uses the Vanguard 500 Index Fund in his retirement account, describes it as “one of the lowest cost and most popular in the world.”

Protege Partners accepted Buffett’s challenge and selected five funds of hedge funds, which have not been disclosed. Hedge funds are managed by Wall Street’s best and brightest and therefore are known to have high fees and costs.

Eight years into Buffett’s 10-year challenge, he has a commanding lead overall. Fortune reports:

For the first eight years of the bet, the index fund he’s backing is up 65.67% against 21.87%, on the average, for the five funds of funds.

When the challenge started, Buffett gave himself a 60 percent chance of winning, while Protege Partners put its odds of winning at 85 percent.

As Stacy Johnson has noted in years past, there are three lessons that anyone can take away from Buffett’s bet:

  • It’s hard to beat the market. There are so many unpredictable variables affecting things like stocks that few humans can consistently outperform it.
  • You don’t always get what you pay for. Hedge funds not only charge high fees, they require high initial investments. Presumably, people who can meet million-dollar minimums aren’t stupid. But if they’re not, why are they paying so much and getting so little?
  • All hat, no cattle. Those in the business of selling their “expertise” want you to believe markets are too complex to navigate without paying them. Buffett knows better, and now you do too.

What point do you think Buffett was hoping to make by publicly challenging the hedge fund industry? Share your thoughts below or on Facebook.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Ways to Shop at Costco Without a Membership
7 Ways to Shop at Costco Without a Membership

You don’t necessarily need to join to get in on the warehouse store’s savings.

What Is Umbrella Insurance, and Do I Need It?
What Is Umbrella Insurance, and Do I Need It?

Umbrella insurance picks up where car and homeowners insurance leaves off. Do you need it? Here’s how to know.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

15 Great Amazon Finds You Can Buy for Less Than $5
15 Great Amazon Finds You Can Buy for Less Than $5

These products offer big value at a small price.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

9 Mistakes People Make When Cleaning With Vinegar
9 Mistakes People Make When Cleaning With Vinegar

Cleaning with vinegar can save you a lot of money, but using it like this can cost you.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

4 States Where Taxes on Social Security May Fall Soon
4 States Where Taxes on Social Security May Fall Soon

These states are considering reducing — or even eliminating — income taxes on Social Security benefits.

10 Things Successful Retirees Do Differently
10 Things Successful Retirees Do Differently

These habits and characteristics can help put you on the track to success.

7 Costly Health Problems That Strike After Age 50
7 Costly Health Problems That Strike After Age 50

As we age, our bodies wear down. Here is how to cut costs associated with some common ailments.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.