Warren Buffett Has $1 Million Worth of Advice For You
Lucy Lindon
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Remember back in 2011 when Mitt Romney challenged Rick Perry to a $10,000 bet (on his healthcare record) in a presidential primary debate? Well, if tossing around $10,000 makes you look a bit out of touch, Warren Buffett is in another stratosphere.

In 2008, the “Oracle from Omaha” bet a New York hedge fund $1 million that his simple, low-cost investing strategy would outperform the hedge fund industry over 10 years. And he’s winning.

Remind me who Warren Buffett is…

He’s a Nebraska-based investor with a famously frugal lifestyle and a net worth in the billions.

He’s also well known for his accessible investing advice: Buffett believes most money-management companies can’t outperform the market by picking stocks. And even if they do, the high fees will wipe out any extra returns. That’s why he tells non-pro investors to buy passively run index funds, low-fee funds that track a market index.

In the bet, Buffett picked a Vanguard fund that tracks the S&P 500, while Protégé Partners, a firm that puts clients’ money into funds made up of hedge funds, took the other side of the bet with five of its funds.

Wait, what’s a hedge fund again?

For decades, investors with millions to invest—from the very wealthy to pension fund managers—have been dabbling in hedge funds, hoping that the high-paid talent and secretive strategies will deliver outsized returns, even during downturns. The term “hedge fund” comes from the idea of hedging against the risk of losing money, or using investment strategies that can make money in any economic environment.

Today, how hedge funds get paid is as much of what defines them as their investing strategies. Hedge funds take an automatic fee—usually 2 percent of the money under management—and a portion of any profits (typically, 20 percent). Those fees are astronomical compared to Buffett’s index fund’s .05 percent expense ratio. So the hedge fund’s performance has to be very, very good to compensate.

How’s the bet going so far?

Although it won’t end until the last day of 2017, it’s not looking good for the hedge fund. Last year, Buffett announced the index fund was beating the hedge funds by nearly 44 percentage points. The latest available numbers show the index fund is up 65.7 percent after fees, compared with Protégé’s 21.9 percent.

And that’s over a period that included a major financial crisis, which could be expected to favor the hedge fund. Protégé did lose less in the crisis (24 vs. Buffett’s 37 percent), and it took Buffett’s investment four years to make up the ground and pull ahead. But the index fund is now well in the lead.

What does all this have to do with me?

Well, Buffett’s not giving us a piece of his winnings or anything; it’s going to charity. But his bet does underscore a powerful investing lesson we can all benefit from: You might get lucky every once in a while trying to time the market, but over time, it often doesn’t even work for the pros. What works? As Buffett himself would tell you, investing in a mix of low-cost funds with the aim of  building wealth over time—and patience.

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32 comments

    That is the 5 year “Average Annual Return”… Meaning you would multiply that annual return by 5 to come up with a slightly above 70% return for the 5 year period.

    In this case, the bet was made in 2007 and it was to run for 10 years through 2017. Well, initially, a $10,000 invested in this fund in 2007 was down to about $5400 by 2009. Since then it has been gaining value and that same $10,000, even after that huge loss, has recovered and is currently estimated at over $19,000… Search the web for VFINX-O and look at a chart and you will see exactly what I described.

    Most of Acorns portfolios are made up of Vanguarde ETFs. They also have some Blackrock. It’s a good way to invest like Warren. Same principles.

    I’ve been using Acorns for 15 months. After you put in your info, you identify the portfolio you want to invest in; conservative to aggressive. The conservative portfolio has the Vanguard funds referenced in this article.
    There’s so many things I love about Acorns:
    1. Investing my round up change (I buy gas for $19.01, Acorns withdraws from the linked account .99 and invests it).
    2. Automatically reinvest dividends (many of the funds pays dividends and investing the dividends is another way of adding to your nest egg).
    Acorns is easy to get started. Here’s your first free $5 when you use my invite code: https://acorns.com/invite/ABDZUT

    You already are (assuming you have any money in your account). The fees Acorn charges ($1 per month for accounts that are less than $5000 & 0.25% for accounts @ $5000 or more) is considered fairly low in comparison to some mutual funds the majority of whom charge fund managment fees rhat exceed Acorn’so fees. In addition, some mutual funds may either charge upfront fees (paid at the time yoi invest into them) or backend fees (paid at the time of withdrawal) which can go as high as 5%.

    I wouldn’t write home about either of those returns. Inflation adjusted neither of those are gonna make you rich.

    I guess if the point is to crap on hedge funds then yeah great, the old grey mare, she ain’t what she used to be.

    Anyone can leverage apps like acorns, setup a brokerage account, buy a small index, setup a DRIP and beat both of these easily. Alll with only the transaction costs.

    4 states in the US teach personal finance in their curriculum. Change this, teach TVOM and badic diligence, this is how we can redistribute wealth

    If everyone started basic low cost investing with minimal capital at age 22 we could get rid of social security almost completely

    I disagree with what you’ve stated in the 1st paragraph. Inflation has totalled 19.64% over the last 10 years. That is an average of 2% per year. When you are invested in a fund that is returning an average of 7% per year, you are pretty close to doubling your initial investment ever 13.7 years.
    In fact the “rule of 72” shows just that… $1000 @ 7.2% per year for 10 years will grow to $2000.

    So I guess it depends on your definition of “make you rich”. But even with a low ~5% difference between inflation and market return (7% – 2%), money doubling every 10 to 13 years sound like a deal I’d definitely write home about.

    Also, it is a known fact that hedge funds do not outperform a bull market. And are better intended as a “hedge” for bear markets. So in making this bet, the was a matter of whether each side had predicted a bear or a bull market. And to assume that it was going to be a bear market for the full 10 years, the hedge fund manager made a grave mistake to take this bet!

    The underlying lesson in this bet is not so much whether an index fund will outperformer a hedge fund, but more so that the costs of investing in an index funds with an expense ratio of 0.05% allows you to keep more if your money compared of a hedge find that is charging “2 & 20” which means fees are 2% of assets invested in the find plus 20% of total return… now that will eat up into any halfway decent return, not inflation!

    Thanks for all your comments. One note: We cannot approve comments that promote Acorns referral codes. So please refrain from posting those in the comments section. Thank you.

    Well acorn isn’t bad but I also like fidelity and schwab. You open an account online and link your bank account or direct deposit from payroll. 🤓

    Warren Buffett I cannot Thank You enough for calling Bill Gates CEO of Microsoft out on the aspect of How did he get rich so quick.
    Yes, he used me! Wish I got some of the profit that MAN has made. However, I was advised not to mess with the Little Attorneys. That I have a WIN WIN CASE. I also have the proof on CD. Would you be able to advise me on a BIG ATTORNEY? I also know it’s a Federal Case.
    Thank You!
    In regards to the device and then on to brain surgery etc. I was told the Tanzanite ring I have OWNS the World.
    Please contact me in regards to this business matter.
    Sincerely,
    Heather M Urich
    Aka Arianna DaVinci

    It is free to open a Vanguard account and load Vanguard mutual, index, or ETF funds. The fees for their funds are much lower than most other companies funds. If you don’t have 10k to open an admiral fund you can start here with VFINX Vanguard 500 index which tracks the top 500 companies on the S&P. Savings will only get you so far with minimal interest. Putting money aside and earning compound interest with investing is the way for a better retirement.

    A lot of words for me. I am a novice at this stuff. I don’t have much money but I do have an Acorn account. Not really able to invest a lot so I wind up letting it sit.

    The benefit with Acorno is that it does not matter how small of an amount you have, it can still get invested instead of “just letting it sit”…

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