You’ll recall that Warren Buffett, the Oracle of Omaha and the outstanding money manager of the past 50 years, made a bet with a hedge fund group, Protégé, in 2008 at the bottom of the market after the Great Recession. Each put up one million dollars and invested in their preferred vehicle and agreed that after 10 years all the proceeds would go to charity along with bragging rights for best strategy.
As we noted earlier, Buffett chose an index fund for his million while Protégé chose a combination of five sophisticated, nuanced, Big Data with Big Analytics, hedge funds. At our last look we found:
Six years into the ten year bet, Buffett through Bogle at Vanguard is up nearly 44% while the five hedge funds are up 13%.
Let’s update through seven years. Maybe Protégé found the gas pedal in the past year!
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%.
Let’s do a little math. After six years . . .
$1,430,000 – Buffett Indexing
$1,130,000 – Protégé Hedging
After seven years . . .
$1,630,000 – Buffett Indexing
$1,190,000 – Protégé Hedging
I simplify an index fund, but take what is essentially a weighted random sample of the largest 500 publicly traded companies in the US (the index) and run that against the smartest guys at the Cool Table hedging from the bottom of the worst market since 1929. After seven years you’ve got nearly $500,000 more in your pocket with the automated index fund compared to the Cool Table hedging. In that seventh year, Protégé made $60,000 while Buffett’s Index made $300,000.
Sure, three years remain. Just wait until the broad market drops, then those smart guys at the Protégé Cool Table will step away from the losses and pick the obvious winners. Or else they will step away from the broad general loss and pick the biggest losers in a declining market and do even worse than an index. Happens more often than you know.
While people are getting wiser about index versus active management for long term investing, there are still a lot of Other Guys out there who believe what the panthers, vampires, and werewolves are telling them. Sometimes there are Falling Apples. Index Funds are an example.
P.S. Is the guy at Protégé who thought of this bet still with the company? This is the kind of persuasion money just cannot buy.
