Warren Buffett Wins His $1,000,000 Bet

Ten years ago, Warren Buffett bet hedge-fund manager Ted Seides that an investment in a passive index fund would outperform a handful of hedge funds over a 10 year period. The bet was for one million dollars, which would go to the charity of the winner's choice.

That bet has now officially ended and, no surprise, Buffett won. His index fund of choice, the Vanguard S&P 500 Index Fund Admiral Shares (VFAIX), returned a 7.1% annualized return compared to the group of hedge funds Seides chose, which returned just 2.2%.

That adds up to a big difference. Buffett's investment almost doubled in value, while the hedge funds' only increased by about 25%.

Not only that, but years ago, the wagers from the bet were invested into the B shares of Berkshire Hathaway stock. Those shares are now worth $2.2 million. That's a nice gain for the winning charity, Girls Inc. of Omaha, too.

Two Keys To Winning

The first key to winning this bet was the time frame. Ten years is a long time. In fact, after the first year of the bet, the hedge fund was actually ahead - Buffett's index fund had lost 37% while the hedge fund lost only about 24%. But as time passed, that edge evaporated.

The second key was costs. Vanguard's fund has an expense ratio of only 0.04%. For every $1,000 invested, they take $0.40 in fees. We don't know what hedge funds Seides selected, but the typical hedge fund charges 2% plus 20% of any gains. In other words,  for every $1,000 invested, they take $20 and, if they make any gains, they take an additional 20% of those gains!

Think about that. For your investment in a hedge fund to simply equal the performance of the index fund, the fund manager would have to beat the market by 22%, year after year. This simply isn't possible.

John Bogle, founder of Vanguard, investigated the results of actively managed funds, such as hedge funds, over the long term. Not one managed to achieve that sort of performance. Ever. Few could even do it for one year. John Bogle wrote an entire book proving it. He founded Vanguard based on that premise.

But stock picking is sexy...

Everyone loves a tale about someone who invested $100 in Apple or Google decades ago and is now a gajillionairre.

People also win the Powerball.

Against all odds, these things do happen.

Sorry to be the one to tell you, but neither of these things will happen to you.

That's not a judgement on your abilities or intelligence. It's simply a statistical fact.

Here's another statistical fact:

No long term, buy and hold investor has ever lost money with a low cost index fund.

Ever. Even if you bought at the peak of the market before any major crash since 1928.

See my post here for details.

If you want to grow your wealth over your lifespan, stick with low cost index funds.