Warren Buffet $500,000 wager with hedge fund manager

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Zeus-cat

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9 years ago Warren Buffet offered a $500,000 wager to any hedge fund manager that was willing to put up his/her money to test Warren Buffet's hypothesis on how individuals should invest their money.

The basics of the wager:

Mr. Buffet contends that no load, low cost, stock index mutual funds are the best choice for individual investors. He proposed that he would select a no load, low cost index fund from Vanguard that invested in the S&P 500. The challenger had to pick any 5 hedge funds and put 20% in each fund (one of them could be his/her own fund).

For those who don't know, hedge funds are touted as being a better alternative to mutual funds and are targeted at the wealthy. Hedge funds are actively managed meaning they buy and sell stocks and mutual funds as they see opportunities for quick or long term profit. Now an S&P 500 index fund is a passive investment that holds all 500 stocks in the S&P 500 in a ratio that matches the values of the companies relative to the total value of all the companies. In other words, if eRockets and Apogee Rockets were both in the S&P 500, and the total value of eRockets stock was twice that of Apogee Rockets, then the index fund would own twice as much of eRockets stock. And it would do this for all 500 stocks.

The wager would last 10 years; at the end of the period the winner is the one who had chosen the investment with the greatest return.

The loser has to donate $500,000 to a charity designated by the winner.

Nine years into the wager and the Vanguard fund is wiping the floor with the hedge fund. The average annual return for the Vanguard fund over the last 9 years is about 7%. The hedge funds are averaging about 2% per year.

So right now it looks like the wager will easily be won by Mr. Buffet.

The takeaway from this? The little guy CAN compete and even do far better that the extremely wealthy when it comes to investing. The KISS philosophy works in your/our favor. The alternative message is become a hedge fund manager and make crap tons of money and produce inferior returns for your clients.
 

Onebadhawk

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Wow,,
I really enjoyed that post,,
Thank you very much..
But nowhere did you mention that anyone took on Mr Buffet's wager...

I guess there are those that may disagree with him,,
but those that disagree with him AND have $500,000 to wager are few,, lol..

Teddy
 

Nytrunner

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The alternative message is become a hedge fund manager and make crap tons of money and produce inferior returns for your clients.

I'm an engineer not a financier or investor, but I have a hunch that some of the inferior returns could perhaps be linked to the underlined statement from the end of your post :dark:
 

Zeus-cat

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Someone did take the wager; Ted Seides. He was a co-manager of Protégé Partners when the wager was made 9 years ago. This was stated in Warren Buffet's annual report for Berkshire Hathaway stock. There is no mention of what Ted Seides is doing now.

More details:

Assuming a portfolio of $1,000,000 at the start of the bet, the hedge fund investment would now be worth about $1,220,000. The index fund investment would be worth about $1,854,000.

So Warren Buffet goes on to say that the typical hedge fund managers get a 2 and 20 fee. They get 2% a year of the assets AND 20% of all profits (if there are profits). THEN, because these are funds of funds, the next layer of managers get another 1% of assets AND also can collect a fee on profits (if any). Meanwhile, the fee for Vanguard's S&P index fund is 0.16% per year plus $20 a year if you have less than $10,000 in the fund.
 

Barkley

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An investment manager for a very large private fund said that the average rate of return would be 8% if you just stayed in the market and rebalanced as Buffet said, but if you missed the top 10 days because you were out of the market then you'd only get 4% in that year. No one knows when those 10 days are - they're unexpected shocks to the system, and if you're timing the market there's no guarantee that you're in when they hit. The moral was to invest long, and rebalance as necessary. Over a long period it works a lot better than timing the market for the vast, vast majority.
 

Woody's Workshop

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This is way over my poor head, even if I were bent over (if I could)
I put $1000 to start an IRA on the side of my employment fund.
It was nearing $5000 at 911. I had set it for 75% aggressive and 25% secured.
When I contact my manager it took about a month to get the paperwork done and switch everything to secured.
By the time it was done, it was down to just over $2000.
I ended up cashing it in to try and save my home.
So I think rebalancing on the fly would work unless it could happen way faster than what it took me to change investment strategies.
But I don't know crap about investing, that's why I went to a person I knew personally to begin with.
 

Barkley

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This is way over my poor head, even if I were bent over (if I could)
I put $1000 to start an IRA on the side of my employment fund.
It was nearing $5000 at 911. I had set it for 75% aggressive and 25% secured.
When I contact my manager it took about a month to get the paperwork done and switch everything to secured.
By the time it was done, it was down to just over $2000.
I ended up cashing it in to try and save my home.
So I think rebalancing on the fly would work unless it could happen way faster than what it took me to change investment strategies.
But I don't know crap about investing, that's why I went to a person I knew personally to begin with.
Rebalancing should be either quarterly, semi-annually, or annually. I do it mid year. All it is is adjusting your portfolio to match what's in the market. I also really like Dividend ReInvestment Plans (DRIPs), because any dividends are reinvested in the underlying stock without you having to purchase it (and pay fees to do so). I don't have many, but I'm happy with each.
 
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