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The Million-Dollar Buffet Bet

[/fusion_text][fusion_text]Warren Buffet is one of my favorite ambassadors for index funds. He frequently comments on the folly of paying exorbitant fees to hedge funds. I happen to agree with him. Those fees, often as high as 2% per year plus 20% of any profits, turn out to be a great compensation scheme for the managers, not a great deal for the investors. Index funds, on the other hand, with their very low fees, allow investors to keep more of their hard-earned money and grow it faster.

Buffet believed so strongly in the triumph of index funds that he offered to wager anyone $500k that the S&P 500 index could outperform high priced hedge funds over a 10-year period. He found one taker in late 2007. Ted Seider, formerly of Protégé Partners LLC, picked a pool of five hedge funds for the competition. The bet started in 2008, meaning we are now in the last year.

How do things look? Buffet’s Vanguard S&P 500 Index Fund is up 85%. The pool of hedge funds selected are only up 22%. Buffet and Seider agreed to donate the winnings to a charity selected by the winner. Things are looking good for Girls Incorporated of Omaha, Buffet’s choice.

I have to say the results are not surprising. It is difficult for any manager to outperform the stock market before fees. Being able to outperform after taking over 2% off the top is highly unlikely. It was incredibly kind of Buffet to give us a real world example to follow. I’m sure Girls Inc. appreciates it too.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.