About Long bets
Long Bets is an organization that maintains predictions. The prediction can be changed to a bet when a counter-argument is provided by the doubter. The bet is valid only if the initiator of the bet accepts the bet. The bet needs to be a win/lose situation without a partial win/lose condition. The winner can nominate a nonprofit organization to whom, the money is granted in case of winning the bet.
Warren bet
A famous bet was made by Warren Buffet in 2007. Active managers could not beat the performance of passive funds (vanguard S&P 500) over a long period. Warren suggested the period to be 10 years. Since the active funds charge 1-2% fees as management fees, the manager makes money if the mutual fund is performed purely or if it has negative returns. There were thousands of active fund managers but one manager “Ted Seides” decided to accept the bet. Ted was a co-manager of Protégé Partners, an asset manager, he raised money from limited partners to form a fund of funds. Ted proposed five fundings to track the best fund managers across the industry, to beat the Passive fund.
The bet started on January 1, 2008 and ended on December 31, 2017.
Results of the bet
The returns of the five funds and the S&P 500 are represented below
| Year | Fund of funds A | Fund of funds B | Fund of funds C | Fund of funds D | Fund of funds E | S&P Index Fund |
| 2008 | -16.50% | -22.30% | -21.30% | -29.30% | -30.10% | -37.00% |
| 2009 | 11.30% | 14.50% | 21.40% | 16.50% | 16.80% | 26.60% |
| 2010 | 5.90% | 6.80% | 13.30% | 4.90% | 11.90% | 15.10% |
| 2011 | -6.30% | -1.30% | 5.90% | -6.30% | -2.80% | 2.10% |
| 2012 | 3.40% | 9.60% | 5.70% | 6.20% | 9.10% | 16.00% |
| 2013 | 10.50% | 15.20% | 8.80% | 14.20% | 14.40% | 32.30% |
| 2014 | 4.70% | 4.00% | 18.90% | 0.70% | -2.10% | 13.60% |
| 2015 | 1.60% | 2.50% | 5.40% | 1.40% | -5.00% | 1.40% |
| 2016 | -2.90% | 1.70% | -1.40% | 2.50% | 4.40% | 11.90% |
| Cumulative Returns | 8.70% | 28.30% | 62.80% | 2.90% | 7.50% | 85.40% |
The results of the long bet are plotted below. The results of the S&P 500 passive gave superior returns for the investors than active investors over 10 years. The average return for the five funds is 2.2% compounded annually. The Returns of the S&P 500 Index fund compounded at a rate of 7.1% annually.
Buffets interpretation
The returns generated by the managers could not outpace the fees charged by the active fund managers. The mutual funds charged 2% fees +20% profit. The S&P 500 just a very small portion of management fees (0.04%).
If we had invested 10L in both the funds during the period. The Passive funds would be 19.85L and the money invested in Active Funds would be 12.43L.
What do you think?
Is this philosophy applicable even today, or is it applicable in the case of a situation like a growing economy like India?
Reference has been taken from the annual letter from Berkshire Hathaway
