Ten years ago, investor Warren Buffett made a bet with Ted Seides of the investment firm Protégé Partners about the relative performance of index funds and hedge funds. The bet stated:
Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.
Buffett has long been critical of money managers, recommending that most people put their money into low-fee index funds instead.
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.
In defense of the bet, Seides wrote:
Having the flexibility to invest both long and short, hedge funds do not set out to beat the market. Rather, they seek to generate positive returns over time regardless of the market environment. They think very differently than do traditional “relative-return” investors, whose primary goal is to beat the market, even when that only means losing less than the market when it falls. For hedge funds, success can mean outperforming the market in lean times, while underperforming in the best of times. Through a cycle, nevertheless, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. We believe such results will continue.
So Buffett invested in a Vanguard index fund and Seides picked five hedge funds of funds. On December 31, 2017, the outcome was clear: the S&P 500 had trounced the hedge funds and Buffett won his bet.
Warren Buffett’s net worth is right around $84 billion. Each morning before he drives himself to work, he tells his wife how much his McDonald’s breakfast is going to cost — $2.61, $2.95, or $3.17 — and she puts the exact change in the cup holder for him to pay with. No, really:
Bill: If we could show you only one number that proves how life has changed for the poorest, it would be 122 million — the number of children’s lives saved since 1990.
Melinda: Every September, the UN announces the number of children under five who died the previous year. Every year, this number breaks my heart and gives me hope. It’s tragic that so many children are dying, but every year more children live.
Bill: More children survived in 2015 than in 2014. More survived in 2014 than in 2013, and so on. If you add it all up, 122 million children under age five have been saved over the past 25 years. These are children who would have died if mortality rates had stayed where they were in 1990.
Bill calls saving children’s lives “the best deal in philanthropy”. Melinda continues:
Melinda: And if you want to know the best deal within the deal — it’s vaccines. Coverage for the basic package of childhood vaccines is now the highest it’s ever been, at 86 percent. And the gap between the richest and the poorest countries is the lowest it’s ever been. Vaccines are the biggest reason for the drop in childhood deaths.
Melinda: They’re an incredible investment. The pentavalent vaccine, which protects against five deadly infections in a single shot, now costs under a dollar.
Bill: And for every dollar spent on childhood immunizations, you get $44 in economic benefits. That includes saving the money that families lose when a child is sick and a parent can’t work.
Sam Hinkie recently resigned as general manager of the NBA’s Philadelphia 76ers. His resignation letter took the form of an investor letter, a la Warren Buffett’s annual letters. Before he gets down to basketball specifics, Hinkie spends several pages explaining his philosophy. Along with Buffett and his business partner Charlie Munger, Hinkie mentions in this introductory section Atul Gawande, Elon Musk, Bill James, James Clerk Maxwell, Bill Belichick, Jeff Bezos, Tim Urban (whom he suggests the Sixers owners should meet for coffee), AlphaGo, and Slack (the Sixers’ front office uses it). He even quotes Steven Johnson about the adjacent possible:
A yearning for innovation requires real exploration. It requires a persistent search to try (and fail) to move your understanding forward with a new tool, a new technique, a new insight. Sadly, the first innovation often isn’t even all that helpful, but may well provide a path to ones that are. This is an idea that Steven Johnson of Where Good Ideas Come From popularized called the “adjacent possible.” Where finding your way through a labyrinth of ignorance requires you to first open a door into a room of understanding, one that by its very existence has new doors to new rooms with deeper insights lurking behind them.
If I didn’t know any better, I’d guess that Hinkie is a regular kottke.org reader. (via farnum street)
When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page.
But subpar it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.
In an op-ed for the NY Times, Warren Buffett proposes a minimum tax on high incomes, specifically “30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that”. He argues that higher tax rates will not curtail investment activity.
Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent - and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.
Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.
Researchers have found that lower income individuals become more opposed to programs designed to help them if people they perceive as below them will also be helped. I don’t have a comment on this except, COMEON!
Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.
Companies are trying to “correlate everything against everything,” he explained, and if they find something that they think will work time and again, they’ll try it out. The interesting, thing, though, is that it’s all statistics, removed from the real world. It’s not as if a hedge fund’s computers would spit the trading strategy as a sentence: “When Hathway news increases, buy Berkshire Hathaway.” In fact, traders won’t always know why their algorithms are doing what they’re doing. They just see that it’s found some correlation and it’s betting on Buffet’s company.
We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed — without delay — our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned.
We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash-equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
Paging through, I was surprised at how much stock Berkshire owns in some major companies, including 13.1% of American Express, 8.6% of Coca-Cola, 8.9% of Kraft, and 18.4% of The Washington Post. Berkshire’s stock price is of interest as well; the stock has never split and the current price for one share is more than $73,000.
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