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Warren Buffett’s Big Bet

By Motley Fool Staff - Mar 15, 2017 at 8:48AM

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By betting that hedge funds can’t beat the S&P 500, Warren Buffett is in the process of proving that individual investors can compete against the most sophisticated investors on Wall Street.

Nine years ago, Warren Buffett made a bet with a hedge fund manager that's about to come due. Buffett bet that a collection of hedge funds would not be able to beat the 10-year return on the S&P 500. He's now on the verge of winning that bet.

With only a single year left on the wager and the large-cap index up over the best-performing fund by more than 20 percentage points, there seems to be little chance that Buffett will not prevail. Listen in on this week's episode of Industry Focus: Financials to hear what Gaby Lapera and John Maxfield think this means for individual investors.

A full transcript follows the video.

This podcast was recorded on March 6, 2017.

Gaby Lapera: I don't know if you remember this, but back in 2008, Warren Buffett made this bet with some hedge fund managers, saying that he bet them the S&P 500 would outperform the hedge funds over a 10-year period. And whoever won, so, whoever's moneymaking device went up in a greater percentage over the course of the 10 years, would pay $1 million to a charity of their choice. And we are nearing the end of that. There's only one year left in that competition.

John Maxfield: Yeah, we have one year. To recap, Buffett has basically said, "Nine years ago, I bet a hedge fund manager that a selection of hedge funds that they choose can't beat the S&P 500." So now, fast-forward to today, one hedge fund manager took him up on that offer, selected five hedge-fund funds of funds, that's a hedge fund that invests in other hedge funds, so that gives you even greater diversity, which would presumably give you a better chance to beat the S&P 500. The best of the five funds that this manager selected is up 62.8% since the bet was made. The S&P 500 is up by 85.4%. And that was the best group, by far. The other ones are like 2.9%, 7.5%, 8.7%, and 28.3%.

Lapera: That's so rough.

Maxfield: Yeah. And it just goes to show, and he talked extensively about this in the letter, maybe these investors -- the rate structure for hedge funds, they pay a ton of money for these things -- maybe there isn't as much value there as people think.

Lapera: Yeah, and this is a big thing that Warren Buffett is about, and The Motley Fool, to some extent, too. If you don't have time to closely monitor your investments, consider investing in the S&P 500. It will probably get you a better rate of return over time for much cheaper than a hedge fund, without the potential pitfalls of owning individual stocks. But yeah, I bet those hedge fund managers are kept up at night by this bet.

Maxfield: Yeah, but you know what I love about this? Buffett is basically telling people, "Look, complicated investing isn't necessarily the best investing." The Motley Fool, we're a company that speaks to individual investors that don't have all the money and sophistication to pour into developing models and doing all of these things. And what this shows is, you don't need that to compete in the markets in a competitive way. It's just a reassuring thing for investors, and it's something that I think investors should really listen to, and take that advice.

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