Investing Like The Greatest. Lessons Learned.

I’m going to ask you one question, and it’s quite simple. Are you betting with or against Warren Buffett?

It was in the year 2005 – Warren Buffett argued that active investment managers, in aggregate, and over a period of years, would underperform the returns achieved by rank amateurs who simply sat still.

His theory is this: The value of the stock-market is owned by the aggregate of it’s investors (the market). Investors simply holding their investments will receive the market return. Got it so far? Okay great. Now, enter active investment managers. The aim, to outsmart other investors – for a fee of course. The aggregate of investors still own the value of the stock market, less fees and expenses paid. It’s arithmetic – active investors must, in aggregate lose to passive investors. Nobel Prize winner, Eugene Fama describes this well in his 2009 essay. The killer is the massive fees levied by a variety of “helpers” (as described by Buffett), leaving their clients worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

In 2007, Buffett made a bet. He publicly offered to wager $500,000 that no investment pro could select a portfolio of hedge funds that would match the performance of an unmanaged S&P-500 index fund charging only token fees. He suggested a ten-year bet and named a low-cost Vanguard S&P fund as his contender. He then sat back and waited for what he describes as, “a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation.”

What followed was not the parade of fund managers that Buffett had expected, but the sound of silence. Eventually, one man, a gentleman by the name of Ted Seides of Protégé Partners, stepped up to the challenge. Protégé assembled an elite crew, loaded with brains, adrenaline and confidence.

Here’s the final score for the bet – and it was humiliating.

Source: Birkshire Hathaway

I don’t think the bet was made to shame hedge funds, or attack active investment management, rather, highlight two very important, yet simple investment lessons.

1) Costs matter – Buffett ends his footnote by saying, “Performance comes, performance goes. Fees never falter.” The more you pay in the world of investing and money management, the less you get. Most investors get this concept. It’s those that are working in the world of finance that are yet to work it out, or simply don’t want to recognise it. Upon Sinclair once wrote, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

2) Control your emotions – Markets go up, markets go down, and how you respond to the market’s heart-stopping rises and falls has a huge impact on your end return. Seizing opportunities when they present does not require a Harvard degree, rather, the ability to ignore the plethora of noise, speculation, and enthusiasm and focus on what really matters. Buffett refers to this as, “A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”

As the ‘Buffett Bet’ results were released, so too were the latest performance results for Harvard University endowment. The results are no different to the results of the Buffett Bet.

The Harvard University endowment is not only the largest university endowment fund in the US, it has some of the smartest people too. You’d think the fund’s investment returns would be out of this world. Yet even the biggest and the best can’t beat the market over the short, medium, & long-term.


Long a go, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Warren Buffett.

Buffett made a bet and he won. Which side of the bet are you on?