Science, financial science that is, proves that passive index investing returns more than active investing. Of course, that’s all just math and the fact that the greatest money manager in this history of the world (who didn’t use a gun), Warren Buffett also recommends index funds makes no difference. Financial advisors are smarter than math! So in 2008 Buffett made a million dollar ten year bet against Protégé Hedge Funds with the proceeds going to charity. We’ve been tracking the massacre for some time. We first noted:
To date the identity of the five hedge funds remains unknown and with good reason. Six years into the ten year bet, Buffett through Bogle at Vanguard is up nearly 44% while the five hedge funds are up 13%. For those who do their math like E.O. Wilson, let’s call in a mechanic with an abacus.
Do a Tooth Fairy Ratio. Hmmm. Take 44 then divide it by 13 and you get 3.38. That’s a Medium+ Windowpane we just opened. A difference you can see without putting on your glasses. A difference you can see without a Stat Boy. A difference between, “I’ll handle this,” and “Run for your lives!”
Index up 44%; active management up 13%. Anyone can do that math. Then we updated the bet.
Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average — the marker the bet uses — up an estimated 19.6%.
Index up 64%; Protégé up 20%. Passive index investing in a Vanguard S&P 500 Index fund tripled the actively managed hedge fund. That’s still a Medium+ Windowpane advantage for idiot indexing. Now, the latest update.
Mr. Buffett showed a chart comparing the cumulative returns of the two sides of the bet since 2008. As of the end of 2015, the S&P 500 index fund had a cumulative return of 65.7%, outdoing the hedge fund teams’s 21.9% return.
Index 66%; hedge 22%. Still a 3 to 1 advantage, but if you carefully count the change, Protégé is catching up! They are losing at a slower rate!
The bet ends on December 31, 2017, so Protégé has over a year to close the gap. Of course, the only way that happens is if the global economy and the US stock market crash worse than 2008-9 and Protégé is playing the Big Short. They have to put all their money on a bet that there will be no economy or stock market by December 31, 2017. So a business, Protégé, that exists to do business, can only win the bet if everyone goes out of business.
If you don’t get the irony or contradiction in that then please call or visit the nearest Protégé representative at your earliest convenience! I’m sure they’ll be glad to take your money. And, many of you will not spot the panther in the shadows. Mr. Buffett laughs about it.
Mr. Buffett said he’s had a hard time convincing people of this case.
“I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money,” he said, earning a laugh from the crowd. “It’s just unbelievable.”
Persuasion from people – in this case financial advisors – beats both math and reality. We’ve looked at it before, especially from the Cue side. I’ll requote my former insight.
Comparison: When others are doing it, you should, too. Hey, when 83% of other investors are going active, guess where you are going?
Liking: Active managers provide personal contact whether by phone or in the office. They compliment you on your wisdom to save and invest. They praise you for your conscientiousness and love of your family.
Authority: Active managers often have MBA degrees from elite schools plus a lot of sheepskins with other acronyms indicating specialized training and certification.
Reciprocity: Active managers give you their time and expertise and don’t directly bill you for it, so you never pay anything to get into the active fund or receive the active management. You then reciprocate with regular investments into the fund. Later, the fees are taken out of the returns which you don’t carefully count and don’t compare to other funds, like indexes which have much lower fees.
Commitment/Consistency: If they can get you in an active fund the first time, you’ve made that first step which commits you to a system of thought and action that will drive future consistency, even in the face of contradictory information as Warren Buffett drives the Protégé Hedge fund into the ground like a tent peg. The inertia of persuasion takes hold.
Scarcity: Sometimes active funds get so big that they close them to new accounts. Sometimes active funds have a limited supply of shares in new opportunities (Facebook IPO). Act now! Supplies are limited!
Why do all the math that requires all that WATTery when you can surf the Peripheral Route? It’s just money.
P.S. Is Buffett truly the greatest money manager (without a gun)? Count the change and think.
From 1965 through the end of last year, Berkshire shares have risen 1,598,284%, compared to the 11,355% return on the S&P 500.
Buffett is up 140 times more than the index! For every dollar the index made, Buffett made 140. I still kick myself for not investing in Buffett when I first read about him in high school (!!!). While he started in 1965, by 1968 he was already famous and widely known.
Yeah. I’m smart. You can believe Professor Poopypants.
