Buffett’s Bet on the Index: Year 9

It’s that time of year again – time to update the scoreboard on the million dollar wager Warren Buffett made with Protégé Partners in 2008. It was a ten-year bet, pitting a basket of five hedge funds chosen by Protégé against Buffett’s no-frills pick, Vanguard’s S&P 500 Index fund. There’s just one year left to go. Which side is on top?

Although Mr. Buffett is a highly active investor with his own capital, carefully vetting and buying companies for his holding company Berkshire Hathaway, his advice for individual investors has always been simple and passive: Because you can’t know which stocks will be top performers, own a little bit of everything, reinvest dividends and stay invested for a long time. Accept the long-term market return and watch capitalism do its magic.

An index like the S&P is a great choice for that strategy, providing access to 500 companies in every industry sector across the U.S.

Protégé, on the other hand, has all the fancy short-term investing tools that an index doesn’t – stock picking, market timing, industry weighting, derivatives and short-selling. With so much strategic flexibility, some observers thought Protégé might have the upper hand.

The results say otherwise.

After nine years, the index is up 85 percent, the hedge funds 22 percent.  Protégé picked five (unnamed) funds, the best of which is up 63 percent for the duration of the bet; the laggard in the group is up only 3 percent.

On a year-to-year basis, it’s been the same lopsided story. The hedgies won year one, 2008, the first year of the Great Recession (only by losing less than the index). Then Buffett’s side won six years in a row. In 2015, Protégé had a tiny margin of victory.

This past year, the index was up 12 percent compared to one percent for the hedge funds. The rich get richer.  That puts the annual scorecard at 7-2, Buffett leading.

One year to go. We don’t predict, and won’t. But the charity of Buffett’s choice that would benefit, Girls Incorporated of Omaha, probably feels pretty good at this point.

Steve Mott – Guest Columnist & Osbon Capital Editor