Warren Buffett beat the hedge funds. Here's how

One decade ago, Warren Buffett took a $1 million wager that stashing money in an index fund would make you richer tha...

Posted: Feb 25, 2018 11:54 AM
Updated: Feb 25, 2018 11:54 AM

One decade ago, Warren Buffett took a $1 million wager that stashing money in an index fund would make you richer than if you entrusted it with hedge fund managers.

He won -- big time -- and in his annual letter on Saturday, the billionaire Chairman and CEO of Berkshire Hathaway Inc. outlined the final tally. He also took a jab at the hedge fund folks at the losing end.

His pick, the S&P 500, gained 125.8% over ten years. The five hedge funds, picked by a firm called Prot-g- Partners, added an average of about 36%. The names of the funds were not disclosed.

The hedge funds "got off to a fast start, each beating the index fund in 2008. Then the roof fell in," Buffett said. The S&P 500 won every year after.

He detailed a few key takeaways from the experiment.

Making money on the stock market "does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon," he wrote. "What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals."

"Stick with big, 'easy' decisions and eschew activity," Buffett said.

Related: Buffett's Berkshire got a $29 billion gift from new tax code

That's essentially the cornerstone of Buffett's investment philosophy, and proving that point is part of the reason he took the bet in the first place, he said.

Another reason was raising money for Girls Inc. of Omaha, a leadership program for young girls in his hometown, where he donated a $2.2 million prize.

Buffett also sought to make it loud and clear that he doesn't think the exorbitant fees that hedge funds charge are worth it.

Index funds, he argues, can outperform them anyway.

"Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch," Buffett wrote in his annual letter. He noted that the S&P 500 performed just as he expected, and "making money in that environment should have been easy" for the hedge fund investors.

But many investors "experienced a lost decade," he said. "Performance comes, performance goes. Fees never falter."

Buffett also acknowledged a lesson learned from an interesting plot twist over the course of the bet.

At the outset of the wager, Buffett and Prot-g- Partners bought about $300,000 worth U.S. Treasury bonds, widely considered a safe investment.

Related: Warren Buffett is retiring from Kraft Heinz board

The expectation was that the bonds would grow to about $1 million at the end of the decade, and the winner would claim the prize pool for charity.

But, the bonds gave back "pathetic" returns, Buffett wrote.

"[O]ur bonds had become a dumb -- a really dumb -- investment compared to American equities" or stock, he said.

So, in 2012, Buffett and Prot-g- dumped their Treasury bonds and used the money to buy B-class shares of Buffett's Berkshire Hathaway

By the end of the bet, the Berkshire shares were worth $2,222,279 -- about $1.2 million more than they'd hope to earn with the bonds.

"Berkshire, it should be emphasized, has not performed brilliantly" since they purchased the B-class shares in 2012, Buffett said. "But brilliance wasn't needed: After all, Berkshire's gain only had to beat that annual .88% bond bogey -- hardly a Herculean achievement."

In short, he summarized, the "purportedly 'risk-free' long-term bonds" ended up being a "far riskier investment" than common stocks.

Mississippi Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 98886

Reported Deaths: 2979
CountyConfirmedDeaths
Hinds7189161
DeSoto569464
Harrison394175
Jackson358570
Rankin337280
Madison334190
Lee293572
Forrest254275
Jones252780
Washington227879
Lafayette221240
Lauderdale2078126
Bolivar187370
Oktibbeha181952
Lamar176237
Lowndes160858
Neshoba1599104
Panola151631
Sunflower149146
Leflore143882
Warren141850
Pontotoc130116
Monroe125369
Pike124954
Copiah119933
Scott118027
Coahoma117530
Lincoln112353
Marshall111821
Grenada110136
Holmes110060
Yazoo106733
Simpson105847
Tate101938
Union101224
Leake96538
Adams94937
Wayne91521
Pearl River91453
Prentiss88418
Marion87537
Itawamba85921
Alcorn83411
Covington83223
George78513
Tallahatchie78324
Newton78124
Winston74619
Tishomingo71039
Tippah70518
Chickasaw69524
Attala67225
Clarke61149
Walthall60426
Clay59919
Hancock59822
Jasper58415
Noxubee55816
Smith55115
Calhoun52912
Tunica50015
Montgomery47020
Claiborne46516
Yalobusha44414
Lawrence43914
Perry43221
Quitman3905
Greene38917
Stone38013
Humphreys37715
Jefferson Davis34711
Amite34210
Webster33913
Carroll33112
Wilkinson30818
Kemper29115
Sharkey26714
Jefferson2439
Benton2333
Franklin1993
Choctaw1876
Issaquena1063
Unassigned00

Alabama Coronavirus Cases

Confirmed Cases: 138162

Reported Deaths: 2405
CountyConfirmedDeaths
Jefferson20221352
Mobile13558295
Tuscaloosa9029118
Montgomery8894187
Madison800580
Shelby616450
Lee601761
Baldwin564052
Marshall398345
Etowah357545
Calhoun356944
Morgan334929
Houston295421
Elmore273948
DeKalb246121
St. Clair237937
Walker236987
Talladega219030
Limestone215720
Cullman192220
Dallas179926
Franklin179430
Autauga179127
Russell17903
Lauderdale175934
Colbert168426
Blount162915
Escambia162024
Jackson161112
Chilton160930
Dale141844
Covington141628
Coffee13936
Pike122011
Chambers117942
Tallapoosa117385
Clarke110916
Marion97629
Butler91740
Barbour8967
Winston75112
Marengo72820
Pickens67215
Randolph67213
Bibb66411
Lowndes65927
Hale65328
Geneva6505
Lawrence63625
Cherokee62013
Bullock61015
Clay5929
Monroe5928
Washington56012
Crenshaw54532
Perry5436
Conecuh53811
Wilcox53211
Henry5145
Macon48318
Fayette47311
Sumter43419
Cleburne4085
Lamar3822
Choctaw35212
Greene30615
Coosa1743
Out of AL00
Unassigned00
Tupelo
Clear
76° wxIcon
Hi: 77° Lo: 48°
Feels Like: 76°
Columbus
Clear
78° wxIcon
Hi: 79° Lo: 47°
Feels Like: 78°
Oxford
Clear
77° wxIcon
Hi: 76° Lo: 45°
Feels Like: 77°
Starkville
Clear
73° wxIcon
Hi: 75° Lo: 44°
Feels Like: 73°
WTVA Radar
WTVA Temperatures
WTVA Severe Weather