Investing

Warren Buffett Bet $1M on the Merits of Simple, Low-Cost Investing—and Won

Remember back in 2011 when Mitt Romney challenged Rick Perry to a $10,000 bet (on his health care 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 2007, 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 won.

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 had to be very, very good to compensate.

So Buffett's bet paid off?

Big time. Although it wasn't technically supposed to end until December 31, 2017, Protégé Partners' co-founder Ted Seides has conceded. Why so early? Because as of the end of 2016, Seides' five funds had only gained 2.2 percent a year since 2008, for a total of $220,000, compared to S&P 500 gains of 7.1 percent, or a total of $854,000. 

The writing was already on the wall last year, when Buffett announced the index fund was beating the hedge funds by nearly 44 percentage pointsAnd that was 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 still came out on top.

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.

This post was updated on September 18, 2017.

acorns+cnbcacorns cnbc

Join Acorns

GET STARTED

About Us

Learn More

Follow Us

All investments involve risk, including loss of principal. The contents presented herein are provided for general investment education and informational purposes only and do not constitute an offer to sell or a solicitation to buy any specific securities or engage in any particular investment strategy. Acorns is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.

Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Forward-looking statements, including without limitations investment outcomes and projections, are hypothetical and educational in nature. The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts. It is not possible to invest directly in an index.

Advisory services offered by Acorns Advisers, LLC (“Acorns Advisers”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Brokerage and custody services are provided to clients of Acorns Advisers by Acorns Securities, LLC (“Acorns Securities”), a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Acorns Pay, LLC (“Acorns Pay”) manages Acorns’s demand deposit and other banking products in partnership with Lincoln Savings Bank, a bank chartered under the laws of Iowa and member FDIC. Acorns Advisers, Acorns Securities, and Acorns Pay are subsidiaries of Acorns Grow Incorporated (collectively “Acorns”). “Acorns,” the Acorns logo and “Invest the Change” are registered trademarks of Acorns Grow Incorporated. Copyright © 2019 Acorns and/or its affiliates.

NBCUniversal and Comcast Ventures are investors in Acorns Grow Incorporated.