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Although this is not new, we wanted to share the details of a bet Warren Buffett made with Protégé Partners in late 2007.
The intent is to provide our readers with another warning about high fee, actively managed funds.
Warren made a bet that, over the following 10 years, an S&P 500 index would outperform most of 5 expertly selected "funds-of-funds."
He allowed Protégé to select the best experts they could get, who themselves selected hundreds of elite experts and hedge funds.
They had complete freedom to rearrange their portfolios whenever they liked.
The following table summarizes the results of these funds and the S&P 500 over the 10 years that followed.
| Year | S&P 500 | Fund A | Fund B |
Fund C | Fund D | Fund E |
|---|
| 2008 | -37.0% | -16.5% |
-22.3% | -21.3% | -29.3% | -30.1% |
| 2009 | 26.6% | 11.3% |
14.5% | 21.4% | 16.5% | 16.8% |
| 2010 | 15.1% | 5.9% |
6.8% | 13.3% | 4.9% | 11.9% |
| 2011 | 2.1% | -6.3% |
-1.3% | 5.9% | -6.3% | -2.8% |
| 2012 | 16.0% | 3.4% |
9.6% | 5.7% | 6.2% | 9.1% |
| 2013 | 32.3% | 10.5% |
15.2% | 8.8% | 14.2% | 14.4% |
| 2014 | 13.6% | 4.7% |
4.0% | 18.9% | 0.7% | -2.1% |
| 2015 | 1.4% | 1.6% |
2.5% | 5.4% | 1.4% | -5.0% |
| 2016 | 11.9% | -3.2% |
1.9% | -1.7% | 2.5% | 4.4% |
| 2017 | 21.8% | 12.2% |
10.6% | 15.6% | n/a | 18.0% |
| Total | 125.8% | 21.7% |
42.3% | 87.7% | 2.8% | 27.0% |
Most of us expected the results to be closer, with maybe 2-3 funds outperforming the S&P 500 before fees (we thought the large fees associated with funds A-E would be the major difference).
However, the "simple" S&P 500 index fund outperformed all the funds by a wide margin, even ignoring fees (the table excludes the fees which reduced the returns of A-E by 2.5% per year on average).
We hope that this serves as another warning to our visitors – it’s difficult to beat an index fund!
If you want to read Warren’s words about this bet, you can find them in his 2017 letter here.
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