Warren Buffet wins $1 million dollar bet

[canuck5]

Not sure if this was posted anywhere else, but ...... another vote for simple Index Funds

Warren Buffett Won a $1 Million Bet, But The Real Winner is Charity | Fortune

 

[CaptTom]

Thanks, interesting read!

I'm a little stumped here though:

Both Buffett and Protégé Partners originally put around $320,000 into bonds for the bet that was expected to appreciate to $1 million over the course of the 10 years. The bonds ended up appreciating faster than either party expected, and in 2012 the duo decided to purchase Berkshire B shares, which are now worth $2.22 million.

So a $320K bond investment was expected to return $1M in 10 years? Checking an on-line compound interest calculator, that would be a 13% annual return. My bond funds certainly didn't do that well over that period.

But they did better than expected, ending up with $2.2M, or around 23% annual return. That's a heck of a return on bonds! Although admittedly, even one year in an index fund would do it, as long as that year was 2017. It's actually the original expectation which has me scratching my head.

 

[donheff]

Maybe they each put $320K in the pot for a total of $640K?

 

[Curmudgeon]

Maybe they each put $320K in the pot for a total of $640K?

Yeah, but then I wouldn't call that a "$1 million bet"... if they each only had half of the total at stake.

 

[Sunset]

Perhaps the bonds increase in value includes capital gain of the bonds caused by the decline in interest rates ?

Lots of people only think of the interest rate on bonds, but if you hold them directly in a falling interest rate environment, there are capital gains to be had by selling them early.

 

[ERD50]

Maybe they each put $320K in the pot for a total of $640K?

Yeah, but then I wouldn't call that a "$1 million bet"... if they each only had half of the total at stake.

Yes, seems more like a $1M pot, with them putting in 1/2M each (adjusting for anticipated future growth). I'd call that a 1/2M bet, or a 0.36M bet at the time the bet was placed.

I thought this had a few years yet to play out. Last I recall, the hedge fund manager was running about as many excuses as one of our "Beat Boho" contestants (one guess which one!).

Over the course of the bet the S&P 500 index fund returned 7.1% compounded annually, significantly more than the basket of funds selected by an asset manager at Protégé Partners. That basket only returned an average of 2.2%.

Wow, they really lost. Pitiful. And these are the 'big boy' hedge fund managers. And some people insist you need to hire someone to manage your money, it's too hard and too important to DIY , or is that ?

-ERD50

 

[SecondCor521]

Last I recall, the hedge fund manager was running about as many excuses as one of our "Beat Boho" contestants (one guess which one!).

Come to think of it, those two folks sound suspiciously similar. Do we know if Boho runs a hedge fund in real life?

 

[FUEGO]

Wow, they really lost. Pitiful. And these are the 'big boy' hedge fund managers. And some people insist you need to hire someone to manage your money, it's too hard and too important to DIY , or is that ?

You're being disingenuous

You know the hedge funds returned way more than 2.2%. If you include the 2%+20% they were making each year, that is. In fact I bet if you add the 2.2% shareholder's return to the 4.x% they "earned" for themselves on average in management fees, I bet you'll get suspiciously close to the SP500 return of 7.1%

 

[Scrapr]

The way i read the article in 2012 they switched to berkshire b shares. So a good run up in the 5 years gets to 2.22 million. Now will the charity double down and hold the shares? Or cash out and spend on programs?

 

[Independent]

The real winner here is index funds ...

Buffett officially “won” the wager on Friday, but said throughout 2017 that he was confident that he would win.

Over the course of the bet the S&P 500 index fund returned 7.1% compounded annually, significantly more than the basket of funds selected by an asset manager at Protégé Partners.

That basket only returned an average of 2.2%.

So, $100,000 in the index fund grew to $198,000.
While, $100,000 in the hedge funds grew to $124,000.

That's not just "winning", that's "smoking".

 

[ERD50]

You're being disingenuous

You know the hedge funds returned way more than 2.2%. If you include the 2%+20% they were making each year, that is. In fact I bet if you add the 2.2% shareholder's return to the 4.x% they "earned" for themselves on average in management fees, I bet you'll get suspiciously close to the SP500 return of 7.1%

And the managers made that on other people's money! A nice gig!

-ERD50

 

[Texas Proud]

I saw something this morning about Ackman of Pershing Square... which seems to be somebodys idea of a good investor...


Lost about 4% last year... and lost more the year before... and lost over 20% the year before that!!!

I would hate to be paying his high fees for such lousy investing...

 

[NYEXPAT]

I saw something this morning about Ackman of Pershing Square... which seems to be somebodys idea of a good investor...


Lost about 4% last year... and lost more the year before... and lost over 20% the year before that!!!

I would hate to be paying his high fees for such lousy investing...

Remember, past performance is no guarantee of future losses.

 

[FUEGO]

Remember, past performance is no guarantee of future losses.

Unless you consider the impact of paying under the typical 2%+20% fee structure. Then past performance is fully indicative of future underperformance.

 

[Running_Man]

The "Safe" bonds they bought beat both of them and made so much money they switched to Berkshire as this was all a sham transaction for Warren, there was no bet it was a tax deductible deduction both companies made and deducted from their income statements at the time, then publicized as if it was a million dollar bet, which was only made for Warren theatrics as the guy making the "bet, was a long term Warren Buffet friend. Ironically they invested the money not in index stock funds but bonds and then timed them out to buy a managed stock - Berkshire and trounced the index which supposedly can't be beat. Truth is so much stranger than fiction that gets peddled by indexers....

 

[NW-Bound]

Let me get this straight.

Over 10 years, the hedge fund guy grew $1M into $1.24M, or 24% in 10 years.

Over 10 years, the index fund grew $1M into $1.98M, or gain 98% in 10 years.

Active investing by judiciously switching from bonds to a conglomerate stock grew $640K into $2.2M in 10 years, for a gain of 244%.

Hmmm... Interesting!

Why didn't the hedge fund guy invest the same way as they jointly did with the escrow money pot?

 

[Texas Proud]

I have not read anything about this lately.... but a lot of stuff being posted that is just not right...

FWIR, they both bought zero coupon bonds that when matured at the end of the bet would total $1 million... hence a $1 million bet that would be paid in the future...

Nobody could have predicted the huge decrease in interest rates which made the zeros skyrocket... someone would have to look to see where the total would be if they had not sold and reinvested, but I would bet still much more than $1 million... but with the stock market returns the past few years I think they would have done much better than holding the bonds...

 

[harley]

The "Safe" bonds they bought beat both of them and made so much money they switched to Berkshire as this was all a sham transaction for Warren, there was no bet it was a tax deductible deduction both companies made and deducted from their income statements at the time, then publicized as if it was a million dollar bet, which was only made for Warren theatrics as the guy making the "bet, was a long term Warren Buffet friend. Ironically they invested the money not in index stock funds but bonds and then timed them out to buy a managed stock - Berkshire and trounced the index which supposedly can't be beat. Truth is so much stranger than fiction that gets peddled by indexers....

This is a bizarre comment from you, as most of yours tend to make sense. The bet was real, although I tend to agree with other posters that it was a $320K bet, not a million. And giving it to charity is fine. I'm sure every millionaire/billionaire who gives money to charity takes the deduction. They still have to give the money. Personally I only bet with friends. And I've never seen a single person on this forum claim that index funds can't be beat. You know as well as anyone what the concept behind indexing is. I don't care if you are an active or passive investor, that's your choice. But that was a bitter sounding post.

 

[Texas Proud]

I do not see how people do not see it is a $1 bet....


They said the time frame was 10 years... so in 10 years both needed to pony up $500K... both decided that it would be easier to buy the zero and put the money aside now so as not to have to run someone down to get the money.... if they had not sold the bond it would be worth $1 mill when the results were final.... (I am assuming that the bond would mature)....

 

[Chuckanut]

Nobody could have predicted the huge decrease in interest rates which made the zeros skyrocket...

Bingo!

We can't predict the future. We should be well down the slope of oil production based upon what was known 10+ years ago, but we aren't, etc. etc. etc.......

 

[Running_Man]

This is a bizarre comment from you, as most of yours tend to make sense. The bet was real, although I tend to agree with other posters that it was a $320K bet, not a million. And giving it to charity is fine. I'm sure every millionaire/billionaire who gives money to charity takes the deduction. They still have to give the money. Personally I only bet with friends. And I've never seen a single person on this forum claim that index funds can't be beat. You know as well as anyone what the concept behind indexing is. I don't care if you are an active or passive investor, that's your choice. But that was a bitter sounding post.

Where to start……

This whole thing was a marketing ploy, and Warren doesn’t believe the first thing he bet against as was shown with how they invested the real charity money and how he invests his personal fortune at Berkshire Hathaway. The man he “bet” against Ted Seides at the time was a partner representing Protege Partners, the firm from which Warren hired two of the hedge fund managers to run investments for Berkshire Hathaway after the bet was made with a salary and a portion of any gains above the market. So for imaginary money Warren uses index funds, for his actual fortune he actually HIRED THE GUYS HE “BET” against. But golly gee Warren shore is a smart guy knowing about these low fees and the value of these dang things, shore can’t beat them returns. If you need to look it up the Protege hedge fund managers he hired were Todd Combs and Ted Weschler and Protege said the publicity was the best thing to ever happen to the firm.

 

[Texas Proud]

Where to start……

This whole thing was a marketing ploy, and Warren doesn’t believe the first thing he bet against as was shown with how they invested the real charity money and how he invests his personal fortune at Berkshire Hathaway. The man he “bet” against Ted Seides at the time was a partner representing Protege Partners, the firm from which Warren hired two of the hedge fund managers to run investments for Berkshire Hathaway after the bet was made with a salary and a portion of any gains above the market. So for imaginary money Warren uses index funds, for his actual fortune he actually HIRED THE GUYS HE “BET” against. But golly gee Warren shore is a smart guy knowing about these low fees and the value of these dang things, shore can’t beat them returns. If you need to look it up the Protege hedge fund managers he hired were Todd Combs and Ted Weschler and Protege said the publicity was the best thing to ever happen to the firm.

But he is not saying that a rich guy like him, or someone running companies should invest in index funds... he is saying the avg man, or the common man will do better over time in index funds vs managed funds more often than not.... and every study that I have seen backs that up...


He has the ability to get better terms than even some of the professionals... so there is no way some guy with $100K can do that...

 

[harley]

I do not see how people do not see it is a $1 bet....


They said the time frame was 10 years... so in 10 years both needed to pony up $500K... both decided that it would be easier to buy the zero and put the money aside now so as not to have to run someone down to get the money.... if they had not sold the bond it would be worth $1 mill when the results were final.... (I am assuming that the bond would mature)....

Still, if I said I bet you $10 that the Rams would win the Super Bowl, I would be expected to pony up $10, not that you would put in $5 and I would put in $5. That's just how it works. The way you describe it it is a $500K bet. So, publicity.

 

[Texas Proud]

Still, if I said I bet you $10 that the Rams would win the Super Bowl, I would be expected to pony up $10, not that you would put in $5 and I would put in $5. That's just how it works. The way you describe it it is a $500K bet. So, publicity.

Sure, I can see that...


I can also see it as two people putting up half and the winner saying where it goes... no matter how it is structured it is publicity, which is what they wanted...