Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Alex Frakt
Founder
Posts: 10853
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Alex Frakt » Sun Dec 31, 2017 1:09 pm

From Fortune - http://fortune.com/2017/12/30/warren-bu ... ollar-bet/
Buffett officially “won” the wager on Friday, but said throughout 2017 that he was confident that he would win. Over the course of the bet the S&P 500 index fund returned 7.1% compounded annually, significantly more than the basket of funds selected by an asset manager at Protégé Partners. That basket only returned an average of 2.2%.

User avatar
ruralavalon
Posts: 13748
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by ruralavalon » Sun Dec 31, 2017 1:14 pm

Another proof of very diversified index investing.

Remember when hedge funds were the hot investment which savvy investors wanted to be in? But they were only available to the very wealthy select few? An plain vanilla index funds were only for the plebes?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Taylor Larimore » Sun Dec 31, 2017 1:17 pm

Alex Frakt wrote:
Sun Dec 31, 2017 1:09 pm
From Fortune - http://fortune.com/2017/12/30/warren-bu ... ollar-bet/
Buffett officially “won” the wager on Friday, but said throughout 2017 that he was confident that he would win. Over the course of the bet the S&P 500 index fund returned 7.1% compounded annually, significantly more than the basket of funds selected by an asset manager at Protégé Partners. That basket only returned an average of 2.2%.
Alex:

The Fortune article is a good reminder how difficult it is to outperform a broad market index fund. Those who try have the odds against them.

Best wishes for a Happy New Year!

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

exigent
Posts: 740
Joined: Fri May 07, 2010 8:49 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by exigent » Sun Dec 31, 2017 1:20 pm

Taylor Larimore wrote:
Sun Dec 31, 2017 1:17 pm
Alex:

The Fortune article is a good reminder how difficult it is to outperform a broad market index fund. Those who try have the odds against them.

Best wishes for a Happy New Year!

Taylor
Especially after you factor in the fees that usually accompany such attempts...

User avatar
JoMoney
Posts: 5580
Joined: Tue Jul 23, 2013 5:31 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by JoMoney » Sun Dec 31, 2017 1:28 pm

It had higher returns than Buffett's own Berkshire Hathaway stock as well.
... and according to SPIVA scorecard the index beat 85% of domestic mutual funds.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
VictoriaF
Posts: 18525
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by VictoriaF » Sun Dec 31, 2017 3:37 pm

Buffett and I did better than hedge funds in the past ten years.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

statman
Posts: 92
Joined: Mon Jul 20, 2009 6:07 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by statman » Sun Dec 31, 2017 3:53 pm

From Buffett's 2016 letter, a perfect commentary: "The wealthy
are accustomed to feeling that it is their lot in life to get the best
food, schooling, entertainment, housing, plastic surgery, sports ticket,
you name it. Their money, they feel, should buy them something superior
compared to what the masses receive."

"In many aspects of life, indeed, wealth does command top-grade products or
services. For that reason, the financial 'elites' -- wealthy individuals,
pension funds, college endowments and the like -- have great trouble meekly
signing up for a financial product or service that is available as well to
people investing only a few thousand dollars. This reluctance of the rich
normally prevails even though the product at issue is -- on an expectancy
basis -- clearly the best choice. My calculation, admittedly very rough,
is that the search by the elite for superior investment advice has caused
it, in aggregate, to waste more than $100 billion over the past decade."

UpperNwGuy
Posts: 858
Joined: Sun Oct 08, 2017 7:16 pm
Location: Washington DC

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by UpperNwGuy » Sun Dec 31, 2017 5:47 pm

And this is why I will only invest in index funds.
Buy-and-hold retired investor with a 60/40 taxable portfolio: Total Stock + Total Int'l + Total Bond + Interm Term Tax Exempt.

User avatar
nisiprius
Advisory Board
Posts: 36492
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by nisiprius » Sun Dec 31, 2017 8:08 pm

Thank you, Alex.

Buffett's chickens have been counted...

Image

...and recounted...

Image

...and recounted again...

Image

... so many times this year that it's good to know that they finally did hatch.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Nekrotok
Posts: 111
Joined: Wed Aug 10, 2016 3:44 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Nekrotok » Sun Dec 31, 2017 8:30 pm

Hedge funds returned 2.2% apr.
S&P index returned 7.9% apr.
But if I'm reading this correctly, the real winner is the $640k wager that was invested and grew to $2.22 million, which works out to be 13.2% apr?
I guess the moral of the story is you still can't beat Warren Buffett.

ssquared87
Posts: 689
Joined: Tue Apr 02, 2013 9:54 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by ssquared87 » Sun Dec 31, 2017 8:47 pm

Thanks for posting this! Great reminder to remain humble and stay the course.

User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Taylor Larimore » Sun Dec 31, 2017 9:17 pm

Nekrotok wrote:
Sun Dec 31, 2017 8:30 pm

I guess the moral of the story is you still can't beat Warren Buffett.
Nekrotok:

To me, "the moral of the story" is: "It is difficult to beat a broad-market index fund."

Happy New Year!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Call_Me_Op
Posts: 6997
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Call_Me_Op » Mon Jan 01, 2018 8:39 am

Taylor Larimore wrote:
Sun Dec 31, 2017 9:17 pm
Nekrotok wrote:
Sun Dec 31, 2017 8:30 pm

I guess the moral of the story is you still can't beat Warren Buffett.
Nekrotok:

To me, "the moral of the story" is: "It is difficult to beat a broad-market index fund."

Happy New Year!
Taylor
To me, the moral of the story is "investors should avoid hedge funds and other complex, non-transparent, high fee products."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
nisiprius
Advisory Board
Posts: 36492
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by nisiprius » Mon Jan 01, 2018 9:25 am

Call_Me_Op wrote:
Mon Jan 01, 2018 8:39 am
Taylor Larimore wrote:
Sun Dec 31, 2017 9:17 pm
Nekrotok wrote:
Sun Dec 31, 2017 8:30 pm
I guess the moral of the story is you still can't beat Warren Buffett.
Nekrotok: To me, "the moral of the story" is: "It is difficult to beat a broad-market index fund." Happy New Year! --Taylor
To me, the moral of the story is "investors should avoid hedge funds and other complex, non-transparent, high fee products."
Or, as Eugene Fama put it, "If you want to invest in something where they steal your money and don’t tell you what they‘re doing, be my guest." Hedge funds remind me of 1720 company that described itself as "a company for carrying out an undertaking of great advantage, but nobody to know what it is."

Some people seem to think of all investments as being the same: black boxes that output jiggly lines that hopefully go up. I think the protection provided to investors in mutual funds and ETFs, by the Investment Company Act of 1940, are not well understood or appreciated. That's not to say mutual funds are safe, but the things that make them boring, and restrict them from doing the things hedge funds do, are some fairly common-sense things that fall under the heading of "prudence:" limits on leverage, rules about liquidity in the fund's portfolio, rules about diversification, and the requirement to allow daily redemption on demand... they're all there for a reason.

I wonder how many hedge fund clients really understand what they are getting into--of course theoretically they are supposed to--and how many think mostly in terms of exclusivity, that hedge funds are just plain better that mutual funds, that anyone would rather be in a hedge fund if only they could get in--but they only let you become a member if you are cool enough.

Before 2013, hedge funds were not allowed to advertise to the general public. In 2013, the prohibition was lifted. It doesn't seem as if they are advertising yet; I don't know why not. I dread the day when they begin.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
stemikger
Posts: 4866
Joined: Thu Apr 08, 2010 5:02 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by stemikger » Mon Jan 01, 2018 9:52 am

Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

student
Posts: 2524
Joined: Fri Apr 03, 2015 6:58 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by student » Mon Jan 01, 2018 10:04 am

stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.

alfaspider
Posts: 1515
Joined: Wed Sep 09, 2015 4:44 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by alfaspider » Mon Jan 01, 2018 10:07 am

stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Well, he would have won even with a very bond-heavy investment mix.

Dottie57
Posts: 4308
Joined: Thu May 19, 2016 5:43 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Dottie57 » Mon Jan 01, 2018 10:11 am

To me it means that I need to thank the group who selected funds for the 401k plan at work. There are 3 Vanguard equity fndex funds available and I used them. This is before I knew about bogleheads.

User avatar
stemikger
Posts: 4866
Joined: Thu Apr 08, 2010 5:02 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by stemikger » Mon Jan 01, 2018 10:14 am

student wrote:
Mon Jan 01, 2018 10:04 am
stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.
Yes, he said he does not like a fixed AA like 60/40. He basically tells the average person to hold enough in cash to feel secure and put the rest in equities. Here is one video below, but there are several on You Tube.

https://www.youtube.com/watch?v=1N3g47P-iRc
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

student
Posts: 2524
Joined: Fri Apr 03, 2015 6:58 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by student » Mon Jan 01, 2018 10:57 am

stemikger wrote:
Mon Jan 01, 2018 10:14 am
student wrote:
Mon Jan 01, 2018 10:04 am
stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.
Yes, he said he does not like a fixed AA like 60/40. He basically tells the average person to hold enough in cash to feel secure and put the rest in equities. Here is one video below, but there are several on You Tube.

https://www.youtube.com/watch?v=1N3g47P-iRc
Thanks for the link.

User avatar
nisiprius
Advisory Board
Posts: 36492
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by nisiprius » Mon Jan 01, 2018 11:13 am

stemikger wrote:
Mon Jan 01, 2018 10:14 am
student wrote:
Mon Jan 01, 2018 10:04 am
stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.
Yes, he said he does not like a fixed AA like 60/40. He basically tells the average person to hold enough in cash to feel secure and put the rest in equities. Here is one video below, but there are several on You Tube.

https://www.youtube.com/watch?v=1N3g47P-iRc
It's always the same and he never clarifies important points. For example, although he uses the word "bonds," at 2:17 he says he would favor equities "enormously now over fixed-dollar investments." And whenever he mentions bonds, he always drops in something that makes it clear he's talking about fixed-dollar investments. So we just don't know what he thinks about TIPS, which are inflation-indexed, not subject to his inflation objections, and not "fixed-dollar" investments. In this interview, he says "enough cash to make you feel comfortable." Well, what is that? The implication is that it would be a small number, but he doesn't say that. For me, my comfort level with "cash" would mean a substantial cash allocation.

But in any case, in everything I've read so far where you can extract something resembling a clear recommendation... yeah. What he recommends is a) close to 100% stocks, 90% in the case of his wife; b) something like "cash," but when he gets definite he spells out "Treasuries;" and c) for the stocks, he always recommends "an S&P 500 index fund," and sometimes suggests "Vanguard's."

But he never seems to explain any of these things:

1) When he says "S&P 500," does that specifically "do not include small-caps?"

2) When he says "S&P 500," does that specifically mean "invest in the U.S. only, do not include international?"

3) When he objects to bonds, does that mean only "no nominal bonds?" Or does he mean "no TIPS, either?" And no TIPS, why not, since the objections he raises to "bonds," e.g. "these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal," only apply to nominal bonds?

4) When he says that for his wife's inheritance, he wants 90% stocks, 10% bonds... how do you generalize that to anyone else with different levels of wealth, age, and risk tolerance?

The interview adds another big question. He makes it perfectly clear that he thinks a fixed ratio is "silly" and that allocation should be based on the relation of price to value. That is, he believes in tactical asset allocation. But he doesn't say anything at all about anyone who isn't Warren Buffett should make that judgement. This isn't a trivial question, because in, I think it was the late 1980s and early 1990s, tactical asset allocation funds were popular, a standard offering in 401(k) plans, Vanguard's LifeStrategy funds all did it. And the Wall Street Journal for a while did a regular piece in which they asked various money managers for their recommended stock/bond allocation, and compared it against what they called a "robot mix" of 60/40. I don't remember how that turned out, but tactical asset allocation funds conspicuously failed to beat fixed allocations. The impression back then had been that anybody competent ought to be able to do better than a fixed-ratio allocation, the only question was by how much. But they couldn't.Maybe Warren Buffett knows how to judge the appropriately varying stock/bond allocation, but knowledgeable, professional money managers did not. Vanguard eventually abandoned the "tactical asset allocation" feature of their LifeStrategy funds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

azanon
Posts: 1886
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by azanon » Mon Jan 01, 2018 12:48 pm

I actually haven't studied the backstory on why someone associated with the hedge fund industry made this bet with Warren B., but Hedgefund 101 is that they are lower risk and lower expected return investments relative to stock market beta (e.g. long/short, event driven, global macro strategies designed to reduce investment risk relative to straight market beta). So we found out the higher expected return, of the higher risk S&P 500 beat the lower risk/lower expected return of a hedge fund. Heck, the typical benchmark of a hedge fund is the 3-month treasury index! No one expected a different outcome, right? Basically, there's nothing to see here other than those that though some sort of point was made, when it really wasn't.

The only thing I can figure as to why a hedge fund representative would have made such a bet was if they were anticipating some sort of decade of recession. Given the price levels we're at now, they should consider renewing the bet for another 10.

columbia
Posts: 844
Joined: Tue Aug 27, 2013 5:30 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by columbia » Mon Jan 01, 2018 1:01 pm

Heck, the typical benchmark of a hedge fund is the 3-month treasury index!
Yet another reason to wonder why anyone would pay for the “privilege” of investing in one.

User avatar
stemikger
Posts: 4866
Joined: Thu Apr 08, 2010 5:02 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by stemikger » Mon Jan 01, 2018 1:11 pm

nisiprius wrote:
Mon Jan 01, 2018 11:13 am
stemikger wrote:
Mon Jan 01, 2018 10:14 am
student wrote:
Mon Jan 01, 2018 10:04 am
stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.
Yes, he said he does not like a fixed AA like 60/40. He basically tells the average person to hold enough in cash to feel secure and put the rest in equities. Here is one video below, but there are several on You Tube.

https://www.youtube.com/watch?v=1N3g47P-iRc
It's always the same and he never clarifies important points. For example, although he uses the word "bonds," at 2:17 he says he would favor equities "enormously now over fixed-dollar investments." And whenever he mentions bonds, he always drops in something that makes it clear he's talking about fixed-dollar investments. So we just don't know what he thinks about TIPS, which are inflation-indexed, not subject to his inflation objections, and not "fixed-dollar" investments. In this interview, he says "enough cash to make you feel comfortable." Well, what is that? The implication is that it would be a small number, but he doesn't say that. For me, my comfort level with "cash" would mean a substantial cash allocation.

But in any case, in everything I've read so far where you can extract something resembling a clear recommendation... yeah. What he recommends is a) close to 100% stocks, 90% in the case of his wife; b) something like "cash," but when he gets definite he spells out "Treasuries;" and c) for the stocks, he always recommends "an S&P 500 index fund," and sometimes suggests "Vanguard's."

But he never seems to explain any of these things:

1) When he says "S&P 500," does that specifically "do not include small-caps?"

2) When he says "S&P 500," does that specifically mean "invest in the U.S. only, do not include international?"

3) When he objects to bonds, does that mean only "no nominal bonds?" Or does he mean "no TIPS, either?" And no TIPS, why not, since the objections he raises to "bonds," e.g. "these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal," only apply to nominal bonds?

4) When he says that for his wife's inheritance, he wants 90% stocks, 10% bonds... how do you generalize that to anyone else with different levels of wealth, age, and risk tolerance?

The interview adds another big question. He makes it perfectly clear that he thinks a fixed ratio is "silly" and that allocation should be based on the relation of price to value. That is, he believes in tactical asset allocation. But he doesn't say anything at all about anyone who isn't Warren Buffett should make that judgement. This isn't a trivial question, because in, I think it was the late 1980s and early 1990s, tactical asset allocation funds were popular, a standard offering in 401(k) plans, Vanguard's LifeStrategy funds all did it. And the Wall Street Journal for a while did a regular piece in which they asked various money managers for their recommended stock/bond allocation, and compared it against what they called a "robot mix" of 60/40. I don't remember how that turned out, but tactical asset allocation funds conspicuously failed to beat fixed allocations. The impression back then had been that anybody competent ought to be able to do better than a fixed-ratio allocation, the only question was by how much. But they couldn't.Maybe Warren Buffett knows how to judge the appropriately varying stock/bond allocation, but knowledgeable, professional money managers did not. Vanguard eventually abandoned the "tactical asset allocation" feature of their LifeStrategy funds.
Awesome thoughts! I never knew that about the Life Strategy Funds. I always find your posts great learning experiences. Thanks!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

User avatar
abuss368
Posts: 12738
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by abuss368 » Mon Jan 01, 2018 1:35 pm

stemikger wrote:
Mon Jan 01, 2018 10:14 am
student wrote:
Mon Jan 01, 2018 10:04 am
stemikger wrote:
Mon Jan 01, 2018 9:52 am
Let's not forget this was an all stock portfolio. Most investors can't do that. I'm so glad he won, but I wish Warren would suggest a different AA when he tells what the average main street investor should do.

On the other hand my 60/40 two fund portfolio is 14.53% year-to-date. I listened to Jack!
Did he ever suggest the AA for average main street investor? I am not aware of one. There is the often quoted 90/10 AA but I think it is the AA for the wealth that he leaves for his wife.
Yes, he said he does not like a fixed AA like 60/40. He basically tells the average person to hold enough in cash to feel secure and put the rest in equities. Here is one video below, but there are several on You Tube.

https://www.youtube.com/watch?v=1N3g47P-iRc
I don't think I would be able to sleep at night without my bonds.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
abuss368
Posts: 12738
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by abuss368 » Mon Jan 01, 2018 1:35 pm

Am amazing bet and benefit for charity.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

garlandwhizzer
Posts: 1942
Joined: Fri Aug 06, 2010 3:42 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by garlandwhizzer » Mon Jan 01, 2018 1:41 pm

azanon wrote:
The only thing I can figure as to why a hedge fund representative would have made such a bet was if they were anticipating some sort of decade of recession. Given the price levels we're at now, they should consider renewing the bet for another 10.
I disagree. I believe the bet was made because the hedge fund guy believed he was going to win regardless of macroeconomic background, with or without a decade-long recession. I don't know anyone who is willing to lose a million dollars based on a hunch of a decade long recession, something that has never occurred in our history. Even the deepest recessions are followed by a cyclical bull market rebound which occurred post-1932 even in the Great Depression. Recessions as defined by economists last typically less than three years, not a decade of unremitting market disaster. The ride down in stock prices is bumpy as is the ride up. In point of fact the decade of the bet included the deepest and most severe recession since the Great Depression (2007-2009) which like other recessions was followed by a bull market rebound, this one not a cyclical bull but rather a secular bull that has run on for 8 years. Hedge funds in general did not protect investors from that 2007-9 disaster and they did not benefit much from the post-bear recovery either. Those facts explain their pathetic performance during the decade. That underperformance was not due to specific risk of one hedge fund but rather a bundle of hedge funds carefully selected by an acknowledged expert. Those who charge outrageously high fees and get rich from peddling sophisticated and expensive investment products can always provide an excuse for failure relative to low cost indexes, even for such massive underperformance as in this bet (~7% versus ~2%). Otherwise they'd have to admit the truth. The market humbles their predictions of the future and their investment models on a pretty regular basis.

Garland Whizzer

azanon
Posts: 1886
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by azanon » Mon Jan 01, 2018 1:44 pm

In any event, hedge fund strategies are designed to be lower risk, and generally acknowledged lower return as well, than the S&P 500 index. So what happened was what was expected, just like stocks are expected to beat 3-month treasuries in return. This is true, regardless of the # of people in the industry that are ignorant of hedge fund strategy basics.

There are a few ETFs that use hedge fund strategies. Pick just about any of them, and overlap with S&P 500, and note the higher volatility of the latter. The price of lower volatility is lower expected return. Again, investing 101.

People make the same mistake here that they do with gold; they miss the fact that the primary intent is to reduce risk, not increase return.

The worst thing about hedge funds is the same thing that used to be bad about most active funds; They simply cost too much to implement. It's going to be hard to ever see it as a viable strategy to add diversity until they can start getting the costs of implementation at least under 50 basis points, and that's including the internal trading fees as well.

columbia
Posts: 844
Joined: Tue Aug 27, 2013 5:30 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by columbia » Mon Jan 01, 2018 2:14 pm

azanon wrote:
Mon Jan 01, 2018 1:44 pm
In any event, hedge fund strategies are designed to be lower risk, and generally acknowledged lower return as well, than the S&P 500 index. So what happened was what was expected, just like stocks are expected to beat 3-month treasuries in return. This is true, regardless of the # of people in the industry that are ignorant of hedge fund strategy basics.

There are a few ETFs that use hedge fund strategies. Pick just about any of them, and overlap with S&P 500, and note the higher volatility of the latter. The price of lower volatility is lower expected return. Again, investing 101.

People make the same mistake here that they do with gold; they miss the fact that the primary intent is to reduce risk, not increase return.

The worst thing about hedge funds is the same thing that used to be bad about most active funds; They simply cost too much to implement. It's going to be hard to ever see it as a viable strategy to add diversity until they can start getting the costs of implementation at least under 50 basis points, and that's including the internal trading fees as well.
Costs aside (for the moment): why bother with a hedge fund, when one could just buy 3 month treasuries (based on your stated benchmark) or an ultra short term treasury fund?

User avatar
JoMoney
Posts: 5580
Joined: Tue Jul 23, 2013 5:31 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by JoMoney » Mon Jan 01, 2018 2:22 pm

azanon wrote:
Mon Jan 01, 2018 12:48 pm
...
The only thing I can figure as to why a hedge fund representative would have made such a bet was if they were anticipating some sort of decade of recession. Given the price levels we're at now, they should consider renewing the bet for another 10.
Buffett has said he'd be willing to make the bet again, he just may not be around to see it to completion.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

HEDGEFUNDIE
Posts: 653
Joined: Sun Oct 22, 2017 2:06 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by HEDGEFUNDIE » Mon Jan 01, 2018 9:53 pm

columbia wrote:
Mon Jan 01, 2018 2:14 pm
azanon wrote:
Mon Jan 01, 2018 1:44 pm
In any event, hedge fund strategies are designed to be lower risk, and generally acknowledged lower return as well, than the S&P 500 index. So what happened was what was expected, just like stocks are expected to beat 3-month treasuries in return. This is true, regardless of the # of people in the industry that are ignorant of hedge fund strategy basics.

There are a few ETFs that use hedge fund strategies. Pick just about any of them, and overlap with S&P 500, and note the higher volatility of the latter. The price of lower volatility is lower expected return. Again, investing 101.

People make the same mistake here that they do with gold; they miss the fact that the primary intent is to reduce risk, not increase return.

The worst thing about hedge funds is the same thing that used to be bad about most active funds; They simply cost too much to implement. It's going to be hard to ever see it as a viable strategy to add diversity until they can start getting the costs of implementation at least under 50 basis points, and that's including the internal trading fees as well.
Costs aside (for the moment): why bother with a hedge fund, when one could just buy 3 month treasuries (based on your stated benchmark) or an ultra short term treasury fund?
Actually hedge funds are meant to give you more return per unit of risk taken (I.e “alpha”), not necessarily to deliver lower returns with lower risk. So a true hedge fund should have delivered the same returns as the S&P with lower volatility, or higher returns with slightly higher volatility. But in this case it looks like these particular hedge funds did neither.

TravelforFun
Posts: 1424
Joined: Tue Dec 04, 2012 11:05 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by TravelforFun » Mon Jan 01, 2018 11:55 pm

Had Warren Buffett betted against Charlie Chai, fund manager of Fidelity Select Technology, the outcome would have been different. FSPTX went up 49% in 2017 and averages 13% over 10 years.

TravelforFun

Caduceus
Posts: 1693
Joined: Mon Sep 17, 2012 1:47 am

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Caduceus » Tue Jan 02, 2018 12:47 am

Yet, Buffett has stated many times that he is confident Berkshire Hathaway will beat the S&P 500 over the long run. He's not saying that active stock selection is impossible. He's saying that most people who think they are good at it are bad at it.

david1082b
Posts: 371
Joined: Fri Jun 09, 2017 12:35 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by david1082b » Tue Jan 02, 2018 1:09 am

TravelforFun wrote:
Mon Jan 01, 2018 11:55 pm
Had Warren Buffett betted against Charlie Chai, fund manager of Fidelity Select Technology, the outcome would have been different. FSPTX went up 49% in 2017 and averages 13% over 10 years.

TravelforFun
13% CAGR over the last ten years isn't very good really, it's easy to beat that in hindsight. Paint company Sherwin Williams is an example. All I need is a time machine. Looking at the returns of FSPTX since the year 2000 gets a very different result compared with S&P 500. The point of the bet was to test some ideas about basic low-fee indexing versus complex high-fee strategies while giving some money to charity. I think it worked out OK.

heyyou
Posts: 3096
Joined: Tue Feb 20, 2007 4:58 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by heyyou » Tue Jan 02, 2018 7:13 pm

FSPTX went up 49% in 2017 and averages 13% over 10 years.
What is the average for the nine other years that does not include the 49% year?

GibsonL6s
Posts: 217
Joined: Tue Aug 29, 2017 12:17 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by GibsonL6s » Tue Jan 02, 2018 7:20 pm

Through 16 is discussed in this article.

https://seekingalpha.com/article/410785 ... edge-funds

User avatar
Taylor Larimore
Advisory Board
Posts: 27326
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Taylor Larimore » Tue Jan 02, 2018 9:49 pm

Bogleheads:

In addition to the Buffet bet, I remember two other contests where the S&P Index also trounced competitors.

One contest was in the New York Times. 4 or 5 expertly designed portfolios were pitted against the index for a 10-year period. After about 5 years the contest was quietly dropped because the "experts" were so far behind.

The second contest was between Mr. Bogle and Robert Markman. You can read about it here. Guess who won?

https://www.ifa.com/articles/Bogle_Wins_25_Bet/

Lesson learned: If you are betting against a broad market index fund -- you are likely to lose.

Happy New Year!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
alpine_boglehead
Posts: 220
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by alpine_boglehead » Tue Jan 02, 2018 10:31 pm

Interesting how the math plays out. The hedge funds did exactly as one would have expected. The hedge fund rule of thumb fee model seems to be fees of 2% of assets per year, and 20% of asset growth. Stack this two times because of the fund-of-funds construction.

If you just run that fee model over the market return:

7,1% raw market return, deduct 2% -> 5.1% remain
5.1%, take away 20% of 5.1% -> 4.1% remain
4.1%, take away 2% -> 2.1% remain
2.1%, take away 20% of 2.1% -> 1.7% remain

So, as the actual return was 2.2%, the hedge-funds-of-funds even generated a return of plus 0.5% before fees. 0.5% of alpha vs. 5.4% of fees, wow. One will be hard-pressed to find a better example of the detrimental effect of fees. Especially if you take into account that the timeframe includes a major market crash (where active management is often argued to have an advantage), and that with very boring bonds you'd probably have beaten the 2.2%. :oops:

Or, seen from the other side, the underlying investments would have needed to generate 15.5% before fees to match the market return of 7.1% after fees.

A happy and healthy 2018 to all of you! :D

ccieemeritus
Posts: 560
Joined: Thu Mar 06, 2014 10:43 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by ccieemeritus » Tue Jan 02, 2018 11:08 pm

azanon wrote:
Mon Jan 01, 2018 12:48 pm
I actually haven't studied the backstory on why someone associated with the hedge fund industry made this bet with Warren B.,
...
The only thing I can figure as to why a hedge fund representative would have made such a bet was if they were anticipating some sort of decade of recession.
I can think of several possible reasons:

1) Ted Seides, formerly of Protege Partners, thought they would win (in fact he now claims he'd have a better than even chance in a rematch).
2) Mr. Seides thought he _might_ win with huge upside for himself personally, with a less impacting downside in case of loss.
3) Mr. Seides wanted the publicity/fame associated with the bet.
4) Mr. Seides figured he would make enough in the first 10 years (before the bet was up) that the downside after the bet was over was not important.
5) Mr. Seides wanted an ongoing personal/business relationship with Warren Buffet. For $320,000 2007 dollars, he got it.

While the bet was bad for the hedge fund industry as a whole (unless they won), even losing, it may not have been so bad for Ted Seides. He's probably one of the best known hedge fund managers in the world now right? (Just as the Washington Generals are a well known and decently paid basketball team :-)

Buffett shopped around his bet for a while before Mr Seides accepted it. He only needed one hedge fund manager to take the other side of the bet to make his point. I think his $320,000 was well spent.

Its interesting that Ted Seides is a _former_ manager (and founder) of Protege Partners. Since 2015 he's been at Credit Suisse, Capitol Allocators, and Hidden Brook.

User avatar
Ged
Posts: 3578
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by Ged » Wed Jan 03, 2018 12:02 am

TravelforFun wrote:
Mon Jan 01, 2018 11:55 pm
Had Warren Buffett betted against Charlie Chai, fund manager of Fidelity Select Technology, the outcome would have been different. FSPTX went up 49% in 2017 and averages 13% over 10 years.

TravelforFun
Fidelity Select Technology is not a hedge fund. It is a managed sector fund. Nor was the bet about single hedge funds.

From https://seekingalpha.com/article/410785 ... edge-funds:

"For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager."

So the wager was not that an individual hedge fund would not outperform the S&P, it was that a basket of such hedge funds would fail to outperform the S&P.

It is quite likely that there were individual hedge funds that outperformed the S&P. Of course a Boglehead would say that there is no a priori way to chose one of those to invest your money in.

User avatar
whodidntante
Posts: 3940
Joined: Thu Jan 21, 2016 11:11 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by whodidntante » Wed Jan 03, 2018 12:31 am

I am not in general a fan of hedge funds though I do make an exception for AQR. But a prolonged melt-up environment is exactly when a hedge fund is supposed to lose to an index fund.

bltn
Posts: 179
Joined: Mon Feb 20, 2017 9:32 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by bltn » Wed Jan 03, 2018 10:07 pm

Interesting that in the last 10 years there was a DOJ crackdown on insider trading. Many hedge funds haven't done as well since then.
Maybe this bad period for hedge funds is more than just a reversion to the mean. Good old Wall Street.

lack_ey
Posts: 6605
Joined: Wed Nov 19, 2014 11:55 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by lack_ey » Wed Jan 03, 2018 10:31 pm

alpine_boglehead wrote:
Tue Jan 02, 2018 10:31 pm
Interesting how the math plays out. The hedge funds did exactly as one would have expected. The hedge fund rule of thumb fee model seems to be fees of 2% of assets per year, and 20% of asset growth. Stack this two times because of the fund-of-funds construction.

If you just run that fee model over the market return:

7,1% raw market return, deduct 2% -> 5.1% remain
5.1%, take away 20% of 5.1% -> 4.1% remain
4.1%, take away 2% -> 2.1% remain
2.1%, take away 20% of 2.1% -> 1.7% remain

So, as the actual return was 2.2%, the hedge-funds-of-funds even generated a return of plus 0.5% before fees. 0.5% of alpha vs. 5.4% of fees, wow. One will be hard-pressed to find a better example of the detrimental effect of fees. Especially if you take into account that the timeframe includes a major market crash (where active management is often argued to have an advantage), and that with very boring bonds you'd probably have beaten the 2.2%. :oops:

Or, seen from the other side, the underlying investments would have needed to generate 15.5% before fees to match the market return of 7.1% after fees.

A happy and healthy 2018 to all of you! :D
The bet was not using a fund-of-funds structure, if I understand it correctly. It was with a fund-of-funds manager, who selected multiple hedge funds to average for the hedge fund benchmark.

Also, not all hedge funds charge 2-and-20 (some more, some less), and I'm not sure the fund-of-funds typically work that way. Maybe they do; it's not something I've looked into intentionally. Furthermore, maybe you weren't intending the calculations to be actually accurate, but that's not quite how the math works.

whodidntante wrote:
Wed Jan 03, 2018 12:31 am
I am not in general a fan of hedge funds though I do make an exception for AQR. But a prolonged melt-up environment is exactly when a hedge fund is supposed to lose to an index fund.
Yeah, you would expect the S&P 500 to win, ex-post, given knowledge that a bull market occurred. Actually, is it just me, or is the 7.1% figure wrong? Maybe I've got the dates of the bet off. The 10-year performance ending in 2017 for the S&P 500 was 8.50% annualized over a risk-free rate I think around 0.5%. But still, the margin of victory is embarrassing.

In general, to assess how sad the situation is, I would want to know more about the underlying hedge funds, what the strategies were, what the actual underlying volatility was and risks taken, etc. Presumably Seides picked funds with higher return potential, not running relatively conservative strategies.

Hedge funds average about a 0.4 market beta, though some of the equity-related exposure is not going to be in public markets, and some of it is going to be in international markets, and we know how those did relative to US stocks the last 10 years. But the ones chosen could be higher or lower than that.

User avatar
alpine_boglehead
Posts: 220
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by alpine_boglehead » Thu Jan 04, 2018 1:46 am

lack_ey wrote:
Wed Jan 03, 2018 10:31 pm
alpine_boglehead wrote:
Tue Jan 02, 2018 10:31 pm
Interesting how the math plays out. The hedge funds did exactly as one would have expected. The hedge fund rule of thumb fee model seems to be fees of 2% of assets per year, and 20% of asset growth. Stack this two times because of the fund-of-funds construction.

If you just run that fee model over the market return:

7,1% raw market return, deduct 2% -> 5.1% remain
5.1%, take away 20% of 5.1% -> 4.1% remain
4.1%, take away 2% -> 2.1% remain
2.1%, take away 20% of 2.1% -> 1.7% remain

So, as the actual return was 2.2%, the hedge-funds-of-funds even generated a return of plus 0.5% before fees. 0.5% of alpha vs. 5.4% of fees, wow. One will be hard-pressed to find a better example of the detrimental effect of fees. Especially if you take into account that the timeframe includes a major market crash (where active management is often argued to have an advantage), and that with very boring bonds you'd probably have beaten the 2.2%. :oops:

Or, seen from the other side, the underlying investments would have needed to generate 15.5% before fees to match the market return of 7.1% after fees.

A happy and healthy 2018 to all of you! :D
The bet was not using a fund-of-funds structure, if I understand it correctly. It was with a fund-of-funds manager, who selected multiple hedge funds to average for the hedge fund benchmark.

Also, not all hedge funds charge 2-and-20 (some more, some less), and I'm not sure the fund-of-funds typically work that way. Maybe they do; it's not something I've looked into intentionally. Furthermore, maybe you weren't intending the calculations to be actually accurate, but that's not quite how the math works.
According to this source it was "portfolio of funds of hedge funds", so yes, at least on the funds-of-funds layer it was probably not hedge funds, but I guess the expense ratios of these funds-of-funds were likely not low either. As you say, it would be interesting to see the actual funds, but as far as I can see, the portfolio was kept confidential.

Yes, these calculations are oversimplified, considering that the hedge funds very likely were not 100% invested in the US stock market and may have a different expense ratio. But you still get the idea that a layered fee structure will make it pretty much impossible to outperform.

BlackHat
Posts: 84
Joined: Tue Feb 14, 2017 1:47 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by BlackHat » Thu Jan 04, 2018 9:48 am

VictoriaF wrote:
Sun Dec 31, 2017 3:37 pm
Buffett and I did better than hedge funds in the past ten years.

Victoria
That's so awesome. You beat the professionals!
“Life is really simple, but we insist on making it complicated.” -- Confucius

BlackHat
Posts: 84
Joined: Tue Feb 14, 2017 1:47 pm

Re: Buffett wins his bet: S&P500 beats selected hedge funds over last 10 years

Post by BlackHat » Thu Jan 04, 2018 11:37 am

Warren Buffett on diversification.

https://youtu.be/wbjPiYE-F4Y
“Life is really simple, but we insist on making it complicated.” -- Confucius

Post Reply