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Betting Against Buffett: So Far Not So Good

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From the title of this article, you may have thought I was referring to someone who took a short position in Berkshire Hathaway. While I don’t personally know anybody who is crazy enough to have done this, at least one person thought it was a good idea. On January 15th, there were 402 shares of Berkshire Hathaway sold short, which as of today’s (2/4/2013) close, would be about $4.4 million in the red since the beginning of the year. If I could give a word of encouragement to these intrepid short-sellers, it would be this:

The bet that I actually had in mind was the $1 million wager1 between Warren Buffett and a New York money manager (Protégé Partners) that pits a selection of five hedge funds picked by Protégé against a Vanguard S&P 500 fund over a ten-year period ending December 31, 2017, with the proceeds going to a charity of the winner’s choice. Having just passed the halfway point, the Vanguard fund picked by Buffett is up by 8.69%, while the five hedge funds are essentially at break-even (up 0.13%). While anything can happen over the next five years, our money is on the Oracle of Omaha.

Buffett’s endorsement of index funds is nothing new. He has repeated it in many of his letters to Berkshire Hathaway shareholders, as well as in many media appearances such as this one from CBS Sunday Morning on January 20, 2013. What I find so truly interesting about Buffett’s advocacy of index funds is his outright rejection of the Efficient Market Hypothesis, which states that since security prices incorporate all readily available information, any effort made in an attempt to “beat the market” is likely to be fruitless. Even if markets are inefficient, Buffett acknowledges that most investors are better off assuming that they are efficient by simply buying index funds.  Perhaps my favorite Buffett endorsement of index funds comes from his 2005 letter to shareholders where he describes a fictional family known as the Gotrocks who just happen to own all the corporations in the United States. Rather than sitting still and collecting their profits, certain members of this family decide they can do better than other members and start trading companies with each other. Naturally, they have to hire advisors (or “helpers”) for their trading which leads them to hire other advisors to help them find the best helpers, and so on. Before they know it, a large chunk of their profits have disappeared forever.  Only a moment’s reflection is needed to realize that we (all investors together) are the Gotrocks. Buffett echoes the advice of John Bogle when he says that buying a simple index fund is the only way to guarantee your fair share of stock market returns. We concur wholeheartedly.