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Warren Buffett Shows How to Make an Easy Million Bucks

June 9th, 2008 · 1 Comment · Investing, Uncategorized


1)  Find some hedge fund rubes who actually think their stock picking “talent” can more than overcome the massive headwinds imposed by their fees, costs and expenses.

2) Bet them a million bucks that they can’t generate higher net returns for clients than an index that tracks the S&P over the long term.

3) Sit back and relax.

Here’s the best part. You don’t even really need to find rubes. Even the fund managers who are fully cognizant that it’s highly unlikely for them to win have to take the bet. If they don’t, they’ll be publicly acknowledging that they are selling snake oil. 

The Economist has weighed in on this many times in the past, this from Feb 2008:

“Hence the clients get engaged in a costly game of chasing the best performers, even though by definition they are bound, on average, to lose it: after costs, the average manager inevitably underperforms the market. Figures from John Bogle of Vanguard, an American fund-management group, neatly illustrate the point. Over the 25 years from 1980 to 2005, the S&P 500 index returned an average of 12.3% a year. Over the same period, the average equity mutual fund returned 10% and the average mutual-fund investor (thanks to his regrettable tendency to buy the hottest funds at the top of the market) earned just 7.3%, five percentage points below the index.”


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1 response so far ↓

  • 1 Steve Roth // Jun 10, 2008 at 7:03 am

    Yep, Buffet’s got a sure win there.

    >*have* to take the bet

    What surprises me is that any single hedge fund or fund of funds would step up to defend the whole industry. Commons, collective action, all that. Are they actually seduced by their own specious and delusional argument on the bid page? Or is it a PR play, figuring it’s worth a million bucks just to be on the same web page with Buffett? And the net present value of their eventual million-dollar loss will be offset by that PR value over the intervening time?

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