Tonight is another money-related post, because not too long after I just posted about my foolishly-high confidence in my stock picking abilities failed to beat the S&P 500 Index last year, another piece of evidence rolled in this week.
I mentioned some time back about how Warren Buffett had placed a $1 million bet with any hedge fund that believed they could outperform a simple S&P 500 Index Fund over a period of 10 years. Well, a partner with the Protege Hedge Funds accepted the bet and with all proceeds going to kids charities, the bet got underway in 2008. And right now at the halfway point in the bet Buffett’s simple Index fund is up 8.69 percent, easily ahead of the hedge funds picked by Protege with their 0.13 percent average increase. You can read more about it here, they only update the public once a year at this time.
It’s vindication, at least so far, of Buffett’s long-held argument that over a number of years, most “experts” aren’t able to outperform the overall stock market. It’s the basis of his belief that all of the various fees that professional money managers charge just to underperform just are not worth it and end up just eating into your profits making your final tally much less than it would have been with a passive, low cost investment like a simple index fund.
2 things standout to me most about this story
1) Remember the frenzy as every fund manager attempted to take up Warren Buffett on this bet, eager to prove that their stock picking abilities would be better than average for the next 10 years? Yeah, neither do I since it did not happen – why not? Shouldn’t these high powered, very well capitalized fund managers with huge research resources at their fingertips have jumped all over this? – unless they know the facts as well that the odds are stacked against them.
2) The individual that did take the bet actually diversified his portfolio among 5 funds – seems like kind of a cheat in itself, but the odd thing is that they have not revealed which 5 funds his money has been bet on – if it’s a closed fund, why not proudly proclaim which fund you are betting a million dollars on – unless the confidence is just not there – and yes, I totally get that perhaps they are hiding the fund so neither side can manipulate the fund and its trading activity but that’s seems unlikely unless the fund is so small as to not really represent a typical fund anyway, which theoretically probably increases the odds that it won’t be able to replicate the markets broad activity level anyway.
When it comes to performance and most money manager’s records, it reminds me of an example I heard a while back that went something like this where people were trying to find the best stock picker
* Out of 1000 people after the first year, we’ll pretend that 200 of them ended beating the market averages
* Out of those 200 people, 40 of them again beat the market average
*Out of those 40 people, 8 of them ended up beating the market average for a 3rd time – now they were feeling pretty confident, and everyone around praised their abilities and wondered of their methods, and changed their investments to have them invested by these “star money managers” – when all along, statistics says someone would be in their position, just not who would be.
Ironically, Jack Bogle, founder of the Vanguard Mutual Funds, and father of the Index fund, came out this week as well to say that actively managed mutual funds have little place in most portfolios as most mutual funds tend to lag the broader stock market because they have grown too large and have too many costs .
Finally, my favorite story a week ago was this one – where a man successfully outsourced his own job to China for 1/5 of his salary freeing him up to spend the day on the web surfing until his company got suspicious with all of the Chinese activity on their server
And one more story – an oldie but a goodie is this one from 1998 (What’s the Stock Market Got to Do with the Production of Butter in Bangladesh?) that showed how if you search hard enough you can find a pattern in any historical data but by no means should you pretend that it’s an example of causality – but you know Wall Street is selling that to people anyway.