Warren Buffet’s Bet

This is not financial advice — just my thoughts!

You have most likely heard of this man. His name is Warren Buffett and in 2008 was the richest man in the world. This guy is a guru in the investment world. Often referred to as the ‘Oracle of Omaha’, when he talks, people listen.

Now you would think he has this unique ability to make a ton of money from buying shares in the right company. And you would be right. He buys and sells shares to maximise profits for clients in his fund. So how do index funds fit in?

Buffett recently announced that he would like 90% of his fortune to be put into index funds and the remaining 10% in bonds when he departs this world. This is an extract from an open letter that surprised his followers:

My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

He went on to make a point of the costs and fees associated with actively managed funds.

Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.

His advice to the non-professional investor — that’s you and I — is simple. For most people, the people this book is aimed at, invest in an index fund. Not an actively managed fund. Now that is powerful advice from the best investor around.

But there is more.

In 2008, Warren Buffett bet one million dollars of his own money that the S&P500 index would outperform any professional hedge fund willing to take him on. After 10 years, the winner would take all and donate it to charity. One company took him up on the wager. Protege Partners, a New York City money management firm chose 5 funds. Buffett invested his money in a plain index fund that mirrored the S&P500 index. That is, the 500 companies that make up the S&P500.

So how is the bet progressing after 8 years? Buffett’s index fund is about 65% up as of February 2016. The 5 funds that are professionally managed are up about 22%. Barring a major meltdown such as another GFC, the index fund is looking to smash these professional money managers.

Now listen to this! I was listening to NPR radio (a fantastic radio station in the USA) about this little wager. They interviewed one of the money managers from that company that took on Buffett. The interviewer asked what the average person should invest in. His answer? ‘Index funds’. There you go.

So here is the take home message. A cheap index fund that you and I can buy into with minimal fees, is beating the experts, pretty much year after year. For the average mum and dad investor, what would you buy into?

Like what you read? Give Sam Collins a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.