Active vs Passive. The million dollar bet

C

cremeegg

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10 years ago Warren Buffett bet $1m that a passive investment would out perform an active strategy over 10 years. The active strategy devised by a hedge fund called Protege Partners.

For me the most interesting thing was that the initial stake ¢320k each was invested in bonds in 2008 and what happened with that afterward.


see details of the bet here.

http://longbets.org/362/

and you can see the results here.

http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/
 
buffet also bought in heavily to apple about the exact time carl icahn was getting out @ $100

buffet could bet that ireland would develop a spanish climate in ten years and be correct
 
I don't know who that hedge fund crowd are but a 2.2% return in the current bull market could be beaten by a child. It would be interesting to repeat the bet before a falling market though. I would nearly always expect a passive fund to outperform active in a rising market but would be curious to see in a falling one. Can the active manager re-adjust quickly enough to limit losses. Sure there is loads of research out there but a bet with Buffet sounds like a more fun way to find out!!
 
The fund manager was way ahead at the beginning but the S&P quickly caught up.

You would imagine that a fund manager with the ability to switch to less volatile investments can do better in a falling market. But Buffett is all about long term investment and that they market will grow over time e.g. if I invest in the S&P 500 today, do I expect my money to be worth more in 2028 than it is today?

Steven
www.bluewaterfp.ie
 
To my mind although Buffett won the bet on the terms as agreed at the start, he disproved his own contention.

The initial stake was $320k each invested in bonds. By the half way stage this $640k had grown to $1m. Which was the agreed amount to be given to the charity. It was then agreed that this $1m be invested in Buffett's Berkshire Hathaway's B shares. Buffett guaranteed the $1m stake.

This grew to $2.2m over the remaining term beating both the Hedge Fund and the passive investment.

So a stock picker, Buffett, actually beat the broad based passive investment.
 
This is what Buffet was betting against;

a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.

Funds of funds are a disaster in terms of management expenses and churning.
 
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