Warren Buffetts Big Bet

Nine years ago, Warren Buffett made a bet with a hedge fund manager that's about to come due. Buffett bet that a collection of hedge funds would not be able to beat the 10-year return on the S&P 500. He's now on the verge of winning that bet.

With only a single year left on the wager and the large-cap index up over the best-performing fund by more than 20 percentage points, there seems to be little chance that Buffett will not prevail. Listen in on this week's episode of Industry Focus: Financials to hear what Gaby Lapera and John Maxfield think this means for individual investors.

A full transcript follows the video.

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This podcast was recorded on March 6, 2017.

Gaby Lapera: I don't know if you remember this, but back in 2008,Warren Buffett made this betwith some hedge fund managers, saying that he bet them theS&P 500 wouldoutperform the hedge funds over a 10-year period. And whoever won, so, whoever'smoneymaking device went up in agreater percentage over the course of the 10 years, would pay $1 million to a charity of their choice. And we are nearing the end of that. There'sonly one year left in that competition.

John Maxfield:Yeah,we have one year. To recap, Buffett has basically said, "Nineyears ago, I bet a hedge fund manager that aselection of hedge funds that they choosecan't beat the S&P 500." So now,fast-forward to today,one hedge fund manager took him up on that offer, selected five hedge-fund funds of funds, that's a hedge fund that invests in other hedge funds, so that gives youeven greater diversity,which would presumably give you a better chance to beat theS&P 500. The best of the five funds thatthis manager selected is up 62.8% since the bet was made. TheS&P 500 is up by 85.4%. Andthat was the best group,by far. The other ones are like 2.9%,7.5%, 8.7%, and 28.3%.

Lapera:That's so rough.

Maxfield:Yeah. Andit just goes to show, andhe talked extensively about this in the letter, maybe these investors -- the rate structure for hedge funds, they pay a ton of money for these things --maybe there isn't as much value there as people think.

Lapera:Yeah,and this is a big thingthat Warren Buffett is about, and The Motley Fool,to some extent, too. Ifyou don't have time to closely monitor your investments,consider investing in the S&P 500. It will probably get you abetter rate of return over time formuch cheaper than a hedge fund, without thepotential pitfalls of owning individual stocks. But yeah, I bet those hedge fundmanagers are kept up at night by this bet.

Maxfield:Yeah, butyou know what I love about this? Buffett isbasically telling people, "Look,complicated investing isn't necessarily the best investing."The Motley Fool, we're a company that speaks to individual investors that don't haveall the money and sophistication to pour into developing models anddoing all of these things. And what this shows is,you don't need that to compete in the markets in acompetitive way. It's just a reassuring thing for investors,and it's something that I think investors should really listen to, and take that advice.

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