"Buffett's Bet"

[Taylor Larimore]

Bogleheads:

One of my favorite newsletters is "Vectors" edited by a former airline pilot, George Sisti, who became a Certified Financial Planner.

His latest newsletter is titled "Buffett's Bet" but it contains much more valuable information for investors.

http://www.oncoursefp.com/files/Vectors ... 0final.pdf

Thank you, Mr. Sisti!

Taylor

[nedsaid]

This was a good article. Thank you for posting.

[Miriam2]

Thank you for posting the article Taylor. I've been reading about Buffett's Bet. (Great name for a race horse

[Nick341981]

I'm still shocked he could win with nothing but a S&P 500 index fund! After being on the bogleheads forum for a while I figured he would have need at least a third of his portfolio in international and then slice and dice in emerging markets, reits, precious metals, etc. He did it with just a S&P 500.... wow!

[Taylor Larimore]

I'm still shocked he could win with nothing but a S&P 500 index fund! After being on the bogleheads forum for a while I figured he would have need at least a third of his portfolio in international and then slice and dice in emerging markets, reits, precious metals, etc. He did it with just a S&P 500.... wow!

Nick341981:

I am not surprised. When I started investing in 1950 at the age of 26, the S&P 500 stocks were priced under 20. Today the S&P 500 Index is 2,385 (not including dividends).

Lesson I should have learned earlier: Buy a broad market index fund--then stay-the-course.

Best wishes.
Taylor

[saagar_is_cool]

Didn't S&P have a lost decade between 1999 and 2013 ?

[Taylor Larimore]

Didn't S&P have a lost decade between 1999 and 2013 ?

saagar is cool:

Nearly every stock fund will have a "lost decade."

That's the point. "Lost decades" are meaningless for long-term investors who stay-the-course.

Best wishes.
Taylor

[k66]

What's more interesting, as Mr. Sisti reminds us, is not that the S&P500 fund continues to shellacque the hedge fund fund-of-funds, but rather that there were no other hedge fund managers who took the bet.

Where was their confidence when it came time to show off their apparent skills? More likely they knew they couldn't reasonably win the bet, or even make it close, and just elected to stay quiet.

[JoMoney]

I'm still shocked he could win with nothing but a S&P 500 index fund! After being on the bogleheads forum for a while I figured he would have need at least a third of his portfolio in international and then slice and dice in emerging markets, reits, precious metals, etc. He did it with just a S&P 500.... wow!

... Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. ...
To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects.
http://www.berkshirehathaway.com/letters/1996.html

[sid hartha]

The funny part about the bet is that the collateral (in this case bonds) outperformed both Buffet and the Hedge Fund Portfolio!

[knpstr]

I'm still shocked he could win with nothing but a S&P 500 index fund! After being on the bogleheads forum for a while I figured he would have need at least a third of his portfolio in international and then slice and dice in emerging markets, reits, precious metals, etc. He did it with just a S&P 500.... wow!

Hahaha, ouch!
Yeah, a lot of bogleheads are "full of it" too. Many are big supporters of academia's financial theories/hypotheses/ideas.

Really all you need is the S&P 500 fund. Then perhaps throw in a bond fund during retirement if you need that. So why not just keep it boringly simple?

“There seems to be some perverse human characteristic that likes to make easy things difficult. ”-Warren Buffett

But, I mean even I don't follow Warren's advice. I have 100% of my investments in Total Stock Market, not the S&P 500!

[Taylor Larimore]

The funny part about the bet is that the collateral (in this case bonds) outperformed both Buffet and the Hedge Fund Portfolio!

Sid:

There are many different kinds of bonds. For example: Short-term; intermediate-term; long-term. Which kind "outperformed both Buffett and the Hedge Fund Portfolio?"

Thank you and best wishes.
Taylor

[Valuethinker]

Really all you need is the S&P 500 fund. Then perhaps throw in a bond fund during retirement if you need that. So why not just keep it boringly simple?

But, I mean even I don't follow Warren's advice. I have 100% of my investments in Total Stock Market, not the S&P 500!

The small cap effect is real enough that you don't want to ignore the bottom 15% of the US stock market by market capitalization, if you don't have to. (thinking the S&P500 is roughly 85% of all US stocks by market capitalization?).

And remember the S&P500 has some pretty big bets in it: Apple, Facebook, Amazon, Alphabet (Google) plus Exxon Mobil, GE, Pfizer, JP Morgan etc. So diluting those big bets a bit by taking on non S&P500 stocks seems wise.

In principle, a broader index fund should be more cost efficient than the S&P500 (because it doesn't have to buy and sell on member promotion/ demotion). And indeed VG engineers its Total Market fund for very low costs (not just management, but also market impact costs).

[sid hartha]

The funny part about the bet is that the collateral (in this case bonds) outperformed both Buffet and the Hedge Fund Portfolio!

Sid:

There are many different kinds of bonds. For example: Short-term; intermediate-term; long-term. Which kind "outperformed both Buffett and the Hedge Fund Portfolio?"

Thank you and best wishes.
Taylor

Hi Taylor,

I was just going by this chart I saw earlier. According to this the Vanguard ETF EDV* (Extended Duration Treasuries) beats them both over that same time period.


*Seeks to track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index.

[JoMoney]

Really all you need is the S&P 500 fund. Then perhaps throw in a bond fund during retirement if you need that. So why not just keep it boringly simple?

But, I mean even I don't follow Warren's advice. I have 100% of my investments in Total Stock Market, not the S&P 500!

The small cap effect is real enough that you don't want to ignore the bottom 15% of the US stock market by market capitalization, if you don't have to. (thinking the S&P500 is roughly 85% of all US stocks by market capitalization?).

And remember the S&P500 has some pretty big bets in it: Apple, Facebook, Amazon, Alphabet (Google) plus Exxon Mobil, GE, Pfizer, JP Morgan etc. So diluting those big bets a bit by taking on non S&P500 stocks seems wise.

In principle, a broader index fund should be more cost efficient than the S&P500 (because it doesn't have to buy and sell on member promotion/ demotion). And indeed VG engineers its Total Market fund for very low costs (not just management, but also market impact costs).

I don't think they're all that different, and that impact of the bottom 15% seems period dependent:
The S&P 500 has edged out just slightly above the WIlshire 5000 "Total Market" since inception (1970) of that index Morningstar Chart
Using the back-constructed CRSP U.S. Total Market back to 1926-2015 = 9.8%, the S&P index 1926-2016 = 10.0% (numbers can be found in DFA Matrix Book)
The idea that there's less turnover in one over the other is also period dependent, the higher numbers of individual small-caps make up for their weight in the turnover of larger-cap stocks (depending on where the most activity is happening). For the past several years, the VTSAX Total Stock Market fund has had higher turnover than the VFIAX S&P 500 fund.
Neither fund has any holdings larger than a few % in any single stock so saying it's making "Big Bets" on anything is mis-guided, and the difference between even the largest of the funds holdings is less than 1%, really these funds are far more like each other than anything else. They are constructed slightly different, with a similar objective, but overall there isn't much of a real concrete long-term performance difference between them.

[dkturner]

Really all you need is the S&P 500 fund. Then perhaps throw in a bond fund during retirement if you need that. So why not just keep it boringly simple?

But, I mean even I don't follow Warren's advice. I have 100% of my investments in Total Stock Market, not the S&P 500!

The small cap effect is real enough that you don't want to ignore the bottom 15% of the US stock market by market capitalization, if you don't have to. (thinking the S&P500 is roughly 85% of all US stocks by market capitalization?).

And remember the S&P500 has some pretty big bets in it: Apple, Facebook, Amazon, Alphabet (Google) plus Exxon Mobil, GE, Pfizer, JP Morgan etc. So diluting those big bets a bit by taking on non S&P500 stocks seems wise.

In principle, a broader index fund should be more cost efficient than the S&P500 (because it doesn't have to buy and sell on member promotion/ demotion). And indeed VG engineers its Total Market fund for very low costs (not just management, but also market impact costs).

I don't think they're all that different, and that impact of the bottom 15% seems period dependent:
The S&P 500 has edged out just slightly above the WIlshire 5000 "Total Market" since inception (1970) of that index Morningstar Chart
Using the back-constructed CRSP U.S. Total Market back to 1926-2015 = 9.8%, the S&P index 1926-2016 = 10.0% (numbers can be found in DFA Matrix Book)
The idea that there's less turnover in one over the other is also period dependent, the higher numbers of individual small-caps make up for their weight in the turnover of larger-cap stocks (depending on where the most activity is happening). For the past several years, the VTSAX Total Stock Market fund has had higher turnover than the VFIAX S&P 500 fund.
Neither fund has any holdings larger than a few % in any single stock so saying it's making "Big Bets" on anything is mis-guided, and the difference between even the largest of the funds holdings is less than 1%, really these funds are far more like each other than anything else. They are constructed slightly different, with a similar objective, but overall there isn't much of a real concrete long-term performance difference between them.

I have raised the issue of the annualized return of the total stock market index return versus the S&P 500 index on several occasions in the past and I don't recall any of the small-cap premium advocates advancing any reasonable explanation of why the TSM, with allocation to virtually all actively traded small-cap stocks, has historically provided a lower annualized return than the S&P 500, which contained essentially no small-cap stocks. Less anyone think the difference between a 9.8% return and a 10% return over a 90 year period is negligible, it isn't. $10,000 invested at the TSM's 9.8% for 90 years would have grown to $65.3 million while the same sum invested at the S&P 500's 10% would have grown an additional $12.8 million to $78.1 million. If there really has been a small-cap premium, shouldn't the relative returns have been the other way around?

[Chuck]

There are many different kinds of bonds. For example: Short-term; intermediate-term; long-term. Which kind "outperformed both Buffett and the Hedge Fund Portfolio?"

The "million dollar bet" was actually a $640,000 zero-coupon bond. So the yield must have been 4.5%. I think that's the reference. I don't believe it's better than the S&P over that period, though.

[NibbanaBanana]

I agree with all this. The only problem with the S&P index fund is,.......it's simply no fun. NO FUN. I like the excitement of the trade. The possibility (unlikely as it is) of beating the market. I keep about (edit again: about 15%) in my trading account to play with. Have 90% stocks, 5% bonds and 5% cash. Vanguard says I did 7.8% annualized over the last ten years (last time I looked) so I haven't crashed completely. It's fun and wholesome entertainment. Never had any interest in any form of gambling whatsoever and am a dedicated saver. Just can't resist throwing the dice on the New York Stock Exchange though. My dad got me interested in investing and that's all he ever did. Individual stocks. I guess that's where I got it. Can't help myself. Do I need therapy?

[knpstr]

I have raised the issue of the annualized return of the total stock market index return versus the S&P 500 index on several occasions in the past and I don't recall any of the small-cap premium advocates advancing any reasonable explanation of why the TSM, with allocation to virtually all actively traded small-cap stocks, has historically provided a lower annualized return than the S&P 500, which contained essentially no small-cap stocks. Less anyone think the difference between a 9.8% return and a 10% return over a 90 year period is negligible, it isn't. $10,000 invested at the TSM's 9.8% for 90 years would have grown to $65.3 million while the same sum invested at the S&P 500's 10% would have grown an additional $12.8 million to $78.1 million. If there really has been a small-cap premium, shouldn't the relative returns have been the other way around?

When I investigated this at Vanguard, I took a much more simplistic approach I see TSM fund was created in 1992.
If you run VTSMX against VFINX since 1992 (25 years) one sees that TSM market slightly outperforms.

Perhaps there was a flaw in data collection/recording practices of the total stock market some 90 years ago? Or the benchmarks that you used to make such a comparison? Who knows.

But the point of my original comment was that even the Bogleheads try to squeak out better return coming up with which funds to hold and why and how much exposure to international, emerging, small caps, reits, etc, is better and why.

Really the S&P 500 will provide a satisfactory return. There is no requirement that one must tinker and tailor make a portfolio. A satisfactory return should be enough. But human nature the way it is, it even drives the bogleheads to seek a better return then to simply autopilot on 1 fund portfolio.