Why Warren Buffet won the bet

[Koolau]

+1

The "prudent man" rule for fiduciaries limits a single holding to 15% of a portfolio. Some limit to 10%.

FWIW, 14% CAGR is better than Bernie Madoff paid. Falls into the too good to be true category for me. YMMV, however.

Couldn't confirm or refute the "prudent man" rule, but I would think that an investment in a "total stock market" fund or one that's based on the S & P 500 would not be considered too concentrated - maybe even at 50%. After all, there are a lot of different equities represented. That's why index funds seem to work most of the time for most folks with a reasonable time frame. Not suggesting a debate, just sayin'... YMMV

 

[OldShooter]

... I would think that an investment in a "total stock market" fund or one that's based on the S & P 500 would not be considered too concentrated ...

You're absolutely right. Maybe I didn't phrase things clearly. I was trying to make two points:

1) This 14% yielding hedge fund should probably not be more than 15% of a portfolio. Granted it is probably invested in multiple stocks but I would look at it as a single risk, hence avoid overconcentration no matter how good it looked in the rear view mirror. The tale of Taleb's turkey applies:

​

There is a stock-picker named Bill Miller who is legendary for beating his benchmark consistently for 15 years, then losing the majority of his customers' money in the two years following. His lucky streak simply ran out. Hopefully no one was more than 15% invested with him, either.

2) It is unnecessary to "diversify" by buying multiple vanilla index funds like S&P 500, different companies' total market funds, etc. because any one of them is far more diversified than the minimum that is statistically necessary. This is exactly your point. Specialized/sector funds are another matter.

Re 15% my wife was an SVP & business unit manager in the Investments & Trust dept of a major national bank; she lived and breathed fiduciary stuff for most of her career. Some of it rubbed off on me.

Thanks for clarifying.

 

[Sunset]

.....
Being a devoted indexer, I am skeptical of Hedge Funds and would be inclined to tell mom to cash out and come over to the low cost index way of life. But the results for this fund over 40 years cannot be ignored. This fund may be the Warren Buffet of Hedge Funds. It has only had 2 down years in the last 40. Annualized returns of around 14% as far as I can tell. I can't bring myself to suggest changing that position.

I find this 14% amazing (hopefully it's not just from their prospectus) , as generally hedge funds take 2% plus 20% of the profit, so the gross return has had to be about 19% if your Mom's $$$ in that fund really went up by 14% per year.

 

[MichaelB]

Reported today, Buffet and Munger double down. Can't say I disagree ..

"If you go to a dentist, if you hire a plumber, in all the professions, there is value added by the professionals as a group compared to doing it yourself or just randomly picking laymen," Buffett, 86, said. "In the investment world it isn’t true. The active group, the people that are professionals in aggregate, are not, cannot, do better than the aggregate of the people who just sit tight."

Vice Chairman Charles Munger, 93, said "it’s even worse than that" because some hedge fund managers with a long career in the industry -- known for charging 2 percent management fees and taking 20 percent of profits -- do well, attract money and then lose it.

"The investing world is just a morass of wrong incentives, crazy reporting and, I’d say, a fair amount of delusion," Munger said.

https://www.bloomberg.com/news/arti...-spent-on-plumbers-better-than-on-hedge-funds

 

[Texas Proud]

One of the things I would love to see is the comparison of the funds on a rolling 10 years...

IOW, we know that Buffet is winning after 9 years... but if we took the last 8 or 7 or 6.... would he be winning for each time period


I would say YES.... but there is no way to know for sure since the opposition has not been disclosed...

This would also show the rant the other guy made on why he is losing to be false... it is not just 'luck' of timing when the bet happened...

 

[ERD50]

One of the things I would love to see is the comparison of the funds on a rolling 10 years...

IOW, we know that Buffet is winning after 9 years... but if we took the last 8 or 7 or 6.... would he be winning for each time period


I would say YES.... but there is no way to know for sure since the opposition has not been disclosed...

This would also show the rant the other guy made on why he is losing to be false... it is not just 'luck' of timing when the bet happened...

If you can find the data on past years, you could work out the deltas. I seem to recall seeing some year-by-year results.

-ERD50

 

[Texas Proud]

Here is the best that I can find...


Buffett's Bet with the Hedge Funds: Year Nine (BRK.A, BRK.B) | Investopedia

Also, the money is now much more than $1 mill since the investment changed...


From what I am reading... Buffet was down for the first 4 years but moved ahead....

But it looks like he would be winning if you looked at the past 8 years, or 7, or 6 etc... now, if a downturn occurred then they might come back on some of these shorter time periods.... but I guess we will never know...

 

[brucethebroker]

Why pension funds and other institutional investors continue to invest in these is a mystery.

https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett

Perhaps for the same reason some shun generic goods (gasoline, food, etc.) and pay for the big names. The advertising gets 'em (in this case, free publicity/news coverage when a hedge fund has a great year).

 

[brucethebroker]

What is really impressive is that Buffet put his money behind his preaching........

 

[urn2bfree]

I find this 14% amazing (hopefully it's not just from their prospectus) , as generally hedge funds take 2% plus 20% of the profit, so the gross return has had to be about 19% if your Mom's $$$ in that fund really went up by 14% per year.

Exactly my problem. I cannot tell what the return is after the 2 and 20. The only info easily provided to me is the 14% number in published articles about this fund. I am skeptical as well, though this fund has been regularly covered in the news and been investigated by many very big media outlets (and ridiculed by at least one as a greedy, overly influential hedge fund at that). So I am not concerned about a Madoff deal...just about the costs/fees/risk vs reward.

 

[samclem]

I cannot tell what the return is after the 2 and 20. The only info easily provided to me is the 14% number in published articles about this fund.

You can look at her old statements, right? That should show you the total returns she actually received.

I'd try to diversify away from this holding if possible, understanding the
sensitivities due to it's perceived (or actual) great recent performance. "Mom, this fund has done well for you, Dad picked a winner. History shows this kind of performance can be cyclical and never lasts forever. Let's let his original investment ride with them, and take the 'winnings' off the table and move it into something with broader holdings and lower costs."

 

[OldShooter]

... I cannot tell what the return is after the 2 and 20. The only info easily provided to me is the 14% number in published articles about this fund. ...

@urn2bfree, this makes me very nervous. Your mother should have monthly statements from the firm and, unless they are hiding something, the statements should include "time-weighted" returns for the period, YTD and since the account inception.

Is it the case that the initial investment was made and from that point no money has been added or taken out of the account? If so, the current value divided by the initial investment will give you ITD total return. That number taken to the 1/y power where y is the number of years, will give you an annualized return.

Hedge fund investments are usually significant. Assuming that is the case here and you continue to have trouble figuring the situation out, I'd strongly suggest consulting (and paying) a CPA or, better, a Registered Investment Advisor who is a CPA. You really haven't been able to get an adequate understanding of this investment.

If you post the name of the fund, there are people here including me who will go digging for you. Just for the fun of it.

 

[RobLJ]

Intl Smallcap and China have done quite well over the last year and even the Europe fund has done well YTD. Maybe the international worm has begun to turn?
(I've got 1/3 of stock funds in international, or about 20% over all, and I have found that international is the main reason for underperformance the last 5 yrts versus S&P--bond funds are the other reason.)

I do agree with him that diversification is important. I have 17% of my funds in international indexes. They have been dogs for quite a while and I have under performed a lot of folks on this board. For that reason I have not kept up with Buffet's bet either. I think I will continue with my allocation. If I don't, I will be chasing performance.

 

[Independent]

It was global diversification that hurt hedge fund returns more than fees. In fact, a low-cost index of large global companies, the MSCI All Country World Index, almost exactly matched hedge-fund returns during the same nine-year period of our bet...

So, if I wanted US stocks, an index fund beat the hedge funds.

And, if I wanted global funds, the index probably beat the hedge funds.

Okay, that seems to settle it.


(Note, I said "probably beat" because the hedge funds presumably had both US and global stocks, the US beat global, but the hedge funds could only match the global index.)