A market bet between Warren Buffett and Ted Seides suggests you can’t beat the market … Here’s why that’s wrong
In 2007, Warren Buffett made a bet that ultimately made the charity, Girls Inc. of Omaha, Nebraska $2.2 million wealthier.
It began in Buffett’s 2016 letter to Berkshire Hathaway shareholders, when Buffett predicted that the S&P 500 index would outperform most hedge funds going forward.
Basically, Buffett was betting on the strength of the broad market being superior to the stock-picking skills of highly-paid hedge fund managers.
Buffett publicly wagered $500,000, then sat back and waited for what he believed would be a parade of fund managers ready to take his bet.
It turned out, there was just one — Ted Seides, former co-manager of Protege Partners.
The official bet pitted the performance of the S&P 500 index fund against a group of Protege’s handpicked hedge funds. Which would have performed the best after a decade?
It turns out Buffett won … by a landslide.
Seides actually conceded the bet before the official 10 years had passed. That’s because through the end of 2016, the S&P 500 had gained more than 85%; meanwhile the average of Seides’ five funds was up just 22%.
Of course, that was Seides’ average. What was his best-performing fund?
Up just 62.8%.
The S&P dominance continued into 2017, the final year of the wager, as the S&P climbed nearly 20%.
The final results of the bet were a 7.1% annualized gain for the S&P, versus just a 2.2% annualized return for Seides’ funds.
In a fun twist, Buffett invested the wagered dollars ($1 million combined) in Berkshire stock in 2007. After a decade of growth, what was it worth?
$2.2 million … which Buffett donated to Girls Inc. of Omaha, Nebraska.
***So, what do we make of this, other than it’s a fun story?
Well, at first glance, some readers might say the takeaway is “even a professional fund manager can’t beat the market, so you should just invest in index funds.”
In fact, among the explanations Seides offered as to why he lost the bet was “passive investing is all the rage today and the S&P 500 is the most popular index.”
So, is it true? Does passive investing beat active investing? Should investors just buy a broad-index ETF and forget about specific stock selection?
It would appear so based on the outcome of the bet. But if we dig a bit deeper, that conclusion doesn’t hold up. And the reason is right in front of our noses …
You see, for the wagered $1 million to grow to a value of $2.2 million after 10 years — courtesy of Berkshire Hathaway — that implies a compound annual growth rate of 8.2%.
The S&P posted returns of just 7.1% over those same 10 years.
So, sure, the market beat Seides … but it didn’t beat Buffett.
Here’s a chart comparing the S&P 500 index, SPY (which is an index ETF tracking the S&P), and Berkshire, from January 1, 2007 through January 1, 2017. You can see Buffet doubled the index itself and handily outperformed the ETF.
Given this, perhaps there’s a different conclusion we can reach. I’ll let famed investor, Louis Navellier explain:
Index funds are incredibly easy to buy. They charge low management fees. And for some folks, they are a good option.
But if you’re willing to do just a little work and a little extra thinking each year (or let me do it for you), index funds are actually the wrong choice for your portfolio.
For more details, let’s jump into “active versus passive” in today’s Digest. As you’ll see, investing alongside the market can be great … but it doesn’t mean you can’t do better.
***A better system produces better returns
Let’s return to Louis to help set the stage:
Over the past 10 years, the world has gone hog wild for index funds. That’s fine as long as they continue to make new highs.
And, while I am bullish on stocks going forward, I think the sudden, sharp downturn illustrates the dark side of relying on index investing.
Louis then notes how index funds don’t try to beat the market, because they are the market. They buy whatever stocks are included in the specific index. And that presents a problem …
Back to Louis:
You see, when we talk about the Dow Industrials or the S&P 500, it’s important to remember that they don’t exist to show you what the best companies are. They exist to represent the market as a whole.
That’s why — and the index fund companies will NEVER tell you this — their index funds contain a lot of lousy stocks.
Louis provides two such stocks as illustrations. The first is the department-store retailer, Macy’s. Over the last three years, its stock is down 61%.
Back to Louis:
I wouldn’t touch the stock with a 10-foot pole. But do you think the index-fund providers care about Macy’s business? No way. They just want your money, in the form of fund expense fees, in order to provide the shares. All they have to do in return is mindlessly buy stocks like these because they’re in the index!
Louis points toward General Electric as a second example, noting how its stock dropped 70% in a year.
Here’s Louis with the bottom line:
… when you buy an index fund, you essentially chain your portfolio to a bunch of basket cases and corpses. That’s not a great way to build great wealth.
***So, what’s a better way to invest?
How about a quantitative system based on cold, impartial numbers? One that identifies strength, rooted in superior fundamentals and earnings power — and just as important, one that eliminates weakness?
That’s the kind of system Louis has created that powers the selections in his Breakthrough Stocks portfolio. It combines four-decades of market experience with high-powered computers, resulting in a cutting-edge investment system that’s guided by data-driven, preset algorithms.
Here’s a simplified explanation of why such a strategy can beat a standard index fund.
Let’s say Louis had been a part of the Buffett/Seides bet, and had been required to start with the S&P index, but he could make tweaks from there. Using his system that analyzes earnings and fundamental data, Louis would have booted the “Macy’s” and “General Electric” type stocks of that time period. So, right there alone, that would have meant eliminating drags such as a 61%-loss and a 70%-loss on the overall, average return.
Now, think about all the other underperforming stocks which would have been identified and thrown-out by a quantitative system. Even if it could have eliminated just 10% of these underperformers, consider how that would have affected the overall, average return number.
From this perspective, it’s easy to see how a numbers-approach to the markets can outperform.
***Last week, Louis held a special event, detailing the methodology behind his numbers-based approach
From Louis:
My system analyzes roughly 5,000 stocks, grades them according to eight specific fundamental factors, and waits for the right signal — a high Quantitative Score — to time the buy.
Click here to watch my Breakthrough Stocks Summit, because it’s one of the rare times I publicly reveal what my Quantitative Score measures.
In the playback of the event, you’ll hear Louis provide the details of his system. Even better, he gives away the name of his #1 Breakthrough Stock — for free.
The last time he made a stock call similar to this one was back in 2016, when his pick was Nvidia. That stock is now up more than 900% since Louis’ initial call. Just click here to check it out.
By the way, Louis is recommending a new stock for his Breakthrough Stocks portfolio tomorrow. I’m told it’s in the solar sector.
The last solar stock which Louis recommended was Enphase Energy. And how much are Breakthrough Stocks subscribers up in Enphase if they bought on Louis’ rec?
190% … since November.
As we wrap up, yes, a broad-market ETF can post some good numbers … but that hardly means it can’t be beat. The details of the Buffett/Seides bet shows that — and expanding on that, all you have to do is look at Louis’ track record of finding huge winners with his quantitative system to see just how much better you can do.
With a superior system comes superior results.
Have a good evening,
Jeff Remsburg
