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Buffett wins the $500,000 bet against the active manager

To the ordinary man or women on the street in the UK, the name Warren Buffett may not mean much, but to others, especially those in the financial world, his name is gospel.

Warren Buffett made billions thanks to his ability to successfully analyse companies and investment over the years. Now, it looks like he’s about to win $2 million more.

In 2007, during the last recession, Buffett made a bet that the S&P 500 stock index (the US equivalent of the FTSE 100) would outperform hedge funds (actively managed funds which supposedly can make money in rising and falling markets), which he describes in a 2016 letter to Berkshire Hathaway shareholders. He argues that over a period of time, active investment management by professionals would underperform the returns by amateurs who were passively investing.

Buffett publicly offered $500,000 and suggested a 10-year bet. “I then sat back and waited expectantly for a parade of fund managers … to come forth and defend their occupation,” Buffett writes in the letter. “After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?”

Only one person, however, took the bet, according to the 2016 letter: Ted Seides, a former co-manager of Protégé Partners, a specialised asset management and advisory firm. In a Bloomberg post, Seides says that the two agreed to the bet, which pitted low-cost S&P 500 index fund returns against a group of Protégé’s handpicked hedge funds.

In an emailed to CNBC, Buffett’s secretary, Debbie Bosanek, confirmed the news of his win. “I checked with Mr. Buffett and he told me that it’s absolutely certain that he will win the bet, although it won’t be official until January,” she writes. “The money will go to Girls Inc. and it looks like it will be $2 million or so.”

The pot was originally $1 million, but several years ago the money was put into Berkshire Hathaway stock (the company that Buffett manages). That stock is now worth an estimated $1.7 million.

The name of the hedge funds selected by Seides for his side of the bet were not disclosed. The basic terms of the bet are public.

By the end of the bet on 31st December, $1 million invested in the funds chosen by Seides would have gained $220,000 in the same time period that Buffett’s low-fee investment would have earned $854,000.

Buffett’s index investment bet is so far ahead of Seides’ that the hedge fund manager surrendered the bet in May.

“For all intents and purposes, the game is over. I lost,” Seides wrote in the Bloomberg post. Seides gives a multitude of reasons for why he lost, including that “passive investing is all the rage today and the S&P 500 is the most popular index.”

The approach that Buffett took, is how I invest money for my clients at Lexington Wealth and Lexo – it’s time IN the market that counts, not TIMING the market.


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