Investing Verses Gambling

In a 2005 letter to the shareholders of his company wrote that active management professionals (hedge fund managers) not outperform individuals who used a passive (index) investing strategy over a ten-year period. To prove his sincerity in this belief he offered $500,000 (for charity) to anyone willing to accept his challenge.

Warren Buffett believed the large fees from active managers was not worth the cost. That in fact the exorbitant fees only enrichen the finance industry and hurt the consumer.

In 2007 hedge fund manager Ted Seides accepted the challenge. Buffet chose a low-cost Vanguard S&P fund and Seides picked five funds-of-funds with interests in more than 200 hedge funds to go up against Buffett. The official amount for the bet was 1 million dollars.

In December 2017, Buffett claimed victory, noting that the final tally has been an “eye-opener.” Buffett’s pick of a Vanguard S&P index fund delivered an average annual return of 8.5% compared to the fund-of-funds’ 2.4% average annual gain.

By the end of the bet on the $1 million invested in the funds chosen by Seides would have gained $220,000 in the same time period that Buffett’s low-fee investment would have earned $854,000.

Any individuals who invested in these hedge funds also lost out on making money. While at the same time the individuals running the hedge funds enjoyed “earning” their outrageous fees.

“Performance comes, performance goes, fees never falter.”

-         Warren Buffett

Warren Buffett pointed out that:

·        Making money on the stock market; "Does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon."

·        "What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals."

·        "Stick with big, 'easy' decisions and eschew activity.”

·        Buffett also sought to make it loud and clear that he doesn't think the exorbitant fees that hedge funds charge are worth it.

Buffett acknowledged a lesson learned from an interesting plot twist over the course of the bet.

·        At the outset of the wager, Buffett and Seides bought about $300,000 worth U.S. Treasury bonds, widely considered a safe investment.

·        The expectation was that the bonds would grow to about $1 million at the end of the decade, and the winner would claim the prize pool for charity.

·        But, the bonds gave back "pathetic" returns, Buffett wrote.

·        "Bonds had become a dumb -- a really dumb -- investment compared to American equities" or stock, he said.

·        So, in 2012, Buffett and Seides dumped their Treasury bonds and used the money to buy B-class shares of Buffett's Berkshire Hathaway (BRKB).

·        By the end of the bet, the Berkshire shares were worth $2,222,279 -- about $1.2 million more than they'd hope to earn with the bonds.

·        In short, the "purportedly 'risk-free' long-term bonds" ended up being a "far riskier investment" than common stocks.

Warren Buffett gave $2.2 million to the charity Girls Inc. of Omaha, Nebraska, after winning a 10-year bet that hedge fund managers couldn’t beat the stock market average, reports the Omaha World-Herald.

John Clifton "Jack" Bogle (May 8, 1929 – January 16, 2019) was an American investor, business magnate, and philanthropist. He was the founder and chief executive of The Vanguard Group, and is credited with creating the first index fund. An avid investor and money manager himself, he preached investment over speculation, long-term patience over short-term action, and reducing broker fees as much as possible. The ideal investment vehicle for Bogle was a low-cost index fund held over a lifetime with dividends reinvested and purchased with dollar cost averaging.

“If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.”

-         Warren Buffett

For more insight and information on passive (index) investing a good source is Jack Bogle’s book:

• Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

“Net return is simply the gross return of your investment portfolio less the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounding returns.”

-         John C. Bogle

“Wise investors won't try to outsmart the market.”

-         John C. Bogle

Attempting get rich schemes may very well lead to going broke quickly.

Trying to get rich quick is gambling it is not investing.