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The $1 Million Dollar Bet: Buffett Winning Big

BJ Banner

Warren Buffett is considered a household name amongst the investment community. The famed investor and third richest man on planet earth is well-known for his investing acumen. Although he has had long-term success in beating the overall stock market, he is also well known for telling investors to do the exact opposite. In fact, he has even requested that his wealth be put into low-cost index funds when he passes away. It is an interesting dichotomy and a classic example of “do as I say, not as I do.”

Mr. Buffett has acknowledged the difficulty in trying to outsmart the market and has been clever in his ways of portraying that idea to his supporters and the public. Probably near the top of the list is Mr. Buffett’s $1 million dollar bet against Ted Seides, a well-known executive in the world of hedge funds. Addressing an audience in 2006, Mr. Buffett mentioned that he was willing to make a sizable bet that a very simple and boring investment would outperform hedge funds, which Mr. Seides was happy to accept.

The specifics of the bet are whichever could deliver the highest total return from January 1, 2008 to December 31, 2017 (10 years) and the return goes to a charity of the winner’s choice. Mr. Seides’ horse is a combination of hedge funds, which are allegedly fantastic vehicles for making money in any type of market environment. Mr. Buffett’s horse was a very simple index fund that tracks the S&P 500. It was a heavyweight fight of the century with the wizards of Wall Street taking on Jack Bogle’s (founder of the Vanguard Group) most basic investment vehicle out there.

Round 8 of the fight has just ended and the results are making the stories of Mr. Buffett’s intelligence that much more compelling. As of the end of 2015, Mr. Steides’ portfolio of hedge funds has delivered 22% in total return. The simple index fund, in comparison, has delivered that same performance three times over with 66% in total return.

Now we know that the period from 2008 up until now has been a tumultuous one. 2008 was one of the worst years of performance in recorded stock market history. But the active investment community is always ready to tout their belief that active investment management shows up during the tough times and that they can avoid downside volatility while embracing the upside. Hopefully, Mr. Buffett’s cunning experiment can remind investors of the pure nonsense of that belief.

While there is still a chance for Mr. Seides to overcome this very large deficit, he has even acknowledged that the chances are slim. When asked by Jacob Goldstein in an interview with NPR about how most people should invest their money, Mr. Seides willingly exclaimed, “I think they should index.”[1]

With all of this said, we would also like to recommend a great charity to Mr. Buffett come year-end 2017. He should contribute his money to IFA’s 12-Step Recovery Program for Active Investors. It is only fitting given the circumstances.

We are just joking about this last point, Mr. Buffett. While it would be a privilege to bring you on as an equity partner, I am sure you have better things to do, with all due respect.



[1] Goldstein, Jacob. “Armed With An Index Fund, Warren Buffett Is On Track To Win Hedge Fund Bet.” NPR: Planet Money. March 10, 2016. http://www.npr.org/2016/03/10/469897691/armed-with-an-index-fund-warren-buffett-is-on-track-to-win-hedge-fund-bet