Warren Buffett Won His Million-Dollar Bet

Buffett would approve the Saul method…

Warren Buffett Just Officially Won His Million-Dollar Bet

Warren Buffett made a bet that a passive S&P 500 index fund would outperform a basket of hedge funds over a 10-year period, and it concluded at the end of 2017. Not only did Buffett’s pick outperform the hedge funds it was up against, but it did so handily. Here’s the final result of Buffett’s bet on passive investing, and why Buffett prefers index funds to actively managed investments.

First of all, Buffett is not suggesting that all investors should go sell their stock holdings and buy passive index funds. Buffett doesn’t necessarily have anything against stock picking if you have the time, knowledge, desire, and discipline to do it properly. However, the majority of people don’t, which is why Buffett has said that index funds are the best investment most Americans can make.

Buffett’s issue isn’t with individual stocks. Rather, it’s with actively managed funds, particularly those that charge high fees, like hedge funds. Buffett acknowledges that in any given year, some fund managers will certainly beat the market. On the other hand, some will lose to the market. And since all of these funds charge fees, investors are at an inherent disadvantage, especially over the long run.


Denny Schlesinger


Did they run it against a fund that has a fee structure similar to Buffett’s partnership? Mohnish Pabrai, for example, makes his fee structure that way. You pay 25% on profits above 6%. No fee if the fund doesn’t make 6%. If the fund made 100% on its investments in 2017, you’d make 76.5%. If the fund made 25%, you’d make 20.25%.

Would terms like this still let Buffett win his bet?

It was an open bet to anyone with the loser paying $1 million to charity. You could choose any 5 or more hedge funds you like, with average gains minus fees over 10 years compared against the S&P 500.

It was remarkable, given these terms, that no-one took him up on the bet until this guy in the link, who was soundly beaten by the S&P 500.

I didn’t know Buffett invested the bet money. So that 1 million is now 2.2 million given to charity. That’s great!

Buffett had pledged to give any proceeds from the bet to charity, and he selected Girls Inc. of Omaha. The funds from the bet were invested in Berkshire Hathaway (NYSE: BRK-B) stock, which has done quite well, so the original bet amount has grown significantly. In fact, the 11,200 class B shares in the pot are worth more than $2.2 million.

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