Warren Buffett won a cool $1 million from a 10 year bet that a passive index fund would outperform some actively managed hedge funds
One Of The World’s Richest Men ‘Puts His Money Where His Mouth Is’ By Proving An Index Fund Can Deliver A Better Result Than Managed Investments
An Index Fund Comes Out On Top
Warren Buffett won his 10 year bet against a selection of hedge funds.
Though the real winner is a charity called Girls Inc of Omaha, Nebraska, a non-profit organisation empowering young women, which Buffett has long supported. It was given the $1 million prize.
Buffett has long been critical of the hedge fund industry, attacking its high fees and its relatively low returns when compared to promises made to investors. So in 2007, he bet Protégé Partners that a low cost index fund would outperform them.
And boy was he right!
Buffett's S&P 500 index fund compounded a 7.1 per cent annual gain over the decade, surpassing an average gain of 2.2 per cent by the basket of funds selected by Protégé Partners.
The bet saw each party initially put $320,000 into a zero-coupon Treasury bond, which they estimated would be worth $1 million by 2018. But it was moved into Berkshire Hathaway's class B shares when the bond's value rose faster than expected. The 11,200 shares they bought in 2012 are understood to have been worth $2.2 million when the bet ended.
Ted Seides, a founder of Protégé Partners, conceded the bet in May 2017, saying:
My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory.
Buffett Has Long Been A Supporter Of Passive Funds
In his annual letter to shareholders of his company, Berkshire Hathaway, he wrote:
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.
Both large and small investors should stick with low-cost index funds.
The world’s second richest person, known to fans as “the Oracle of Omaha”, has estimated the search for outperformance has caused investors to “waste” more than $100 billion over the past decade.
He recently called Vanguard Group founder Jack Bogle “a hero” for his early efforts to popularise index funds.
So if you want to earn money while you sleep, take a leaf out of Buffett’s book and get to grips with passive funds.
And even when markets fall, passive funds may still be your best bet.
All You Need To Know About Passive Funds
To view a series of articles on passive funds, click the button below.
At 87, Buffett is not intending to retire at any time soon, as you can see in this short video.
Buffett Is Not Just Famous For His Extraordinary Wealth
He’s also famous for his wise and informative quotes on investing and for life.
According to an article in the Observer, here are 10 of the best.
Unconditional Love Is Huge In This World
I Don’t Work To Collect Money
Live Your Life By An Inner Scorecard
Hang Out With People Who Are Better Than You
You’ve Got To Keep Control Of Your Time
It Takes 20 Years To Build A Reputation And Five Minutes To Ruin It
Stick Within Your Circle Of Competence
Predicting Rain Doesn’t Count. Building Arks Does
Nice People Come In All Colors
The More You Give Love Away, The More You Get
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AJ Bell Is The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).
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