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Ted Seides Concedes Bet with Warren Buffett

182 points by greenburger 9y ago

greenburger 9y ago
For bet details: http://longbets.org/362/ http://longbets.org/362/ [edit: grammar]
- conistonwater 9y ago
  > STAKES $1,000,000 will go to Girls Incorporated of Omaha if Buffett wins, or Friends of Absolute Return for Kids, Inc if Protege Partners, LLC wins. That's one hell of a charity name. Edit: It seems it must be parsed as (Friends of (Absolute Return for Kids)), and good on them that they've renamed it since: https://en.wikipedia.org/wiki/Ark_(charity) https://en.wikipedia.org/wiki/Ark_(charity)
  - forgotpwtomain 9y ago
    Also: We Think Girls Are The Greatest Thing Since Sliced Bread... we serve hundreds of girls every day.
rabidonrails 9y ago
Maybe I'm too biased (in Buffett's favor) but this reads like Seides saying: Sure I lost but Buffett only won because he was lucky. >> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory." <--- Reeks of the Gambler's fallacy.
- dnautics 9y ago
  Gambler's fallacy has to do with independent uncorrelated events. The stock market is no such beast. I have no love for seides, but this is atrocious timing for him. To a certain degree your yield on the s&p depends on timing. I know many people who were hired when the s&p is high and fired when it crashed. For the hoi polloi, i.e. "not Warren Buffett", the s&p is often life-procyclical and they get screwed.
  - tanderson92 9y ago
    Atrocious timing? It seems to me that he got supremely lucky. Within the first 14 months of the bet he had the largest bear market in nearly a century. Isn't this where the "risk management" advantage of hedge funds comes in? And he still lost. Oh, and his piece is littered with false comparisons (picking benchmarks post facto despite knowing he'd be compared to the S&P500 index total return) and falsehoods (international stocks, see VTIAX, have provided a positive return over the period he describes); hard to take him seriously at all.
    - kbutler 9y ago
      Exactly this. Seides and Buffet are saying Buffet will win "unless they get a market crash" (the second in the 10-year period). Yes, hedge funds seek to hedge their bets against bear markets, but if you require two major crashes in 10 years to break even with passive investing, the smart money should go elsewhere.
      - spott 9y ago
        The average time between stock market crashes is roughly 8 years... so 2 in 10 isn't outrageous.
        sweezyjeezy 9y ago
        Yeah but not a sensible bet to take even odds on. It would be about a 20% chance assuming a Poisson distribution (probably entirely false, but you get the point).
  - valuearb 9y ago
    Yea, he got the greatest gift he could ever hope for at the beginning of the bet, and couldn't remotely come close to holding that lead. How often in 10 years do you expect a market correction of that size? He's spewing nonsense now because he got caught with his pants down. His livelihood depends on convincing people that "hedge funds" outperform, no facts to the contrary will ever be accepted by him. He will always mark it up to being unlucky. It really was a terrible bet for Ted, because it has heavily publicized his fund of funds incompetence to his customers and potential customers.
- gingerbread-man 9y ago
  Fallacy could confuse either side of that bet: the gambler's fallacy if he lost, the hot hand fallacy if he won. It seems like he had a reasonable justification for expecting a reversal of fortune in this case-- the US bull market cannot continue forever, and hedge funds traditionally outperform in bear markets and beat the S&P when global markets are stronger than the US.
  - valuearb 9y ago
    If he thought he needed the market to produce returns in the bottom 10-20% of it's average decade returns, it was a terrible one, he's a 4-1 or 9-1 dog. Or maybe he thought the market was overvalued and that it was closer to 50-50 that it would have a bad decade. But that's still a 50-50 bet, no big edge for him. And in both cases the reality is that he's giving up 3-4% a year in fees to the index. That's a huge edge for the index, he'd need the worst decade in history to beat that. Anyone who has every analyzed long term hedge fund returns comes away convinced they are terrible. Those fees are just far too high to overcome for 95% of the funds.
gavman 9y ago
> "Comparing hedge funds and the S&P 500 is a little bit like asking which team is better, the Chicago Bulls or the Chicago Bears. Like the Bulls and the Bears in the Windy City, hedge funds and the S&P 500 play different sports." That, to me, is a CRAZY statement to make. Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return. To say that they "play different sports" is at best stretching the truth, at worst a lie. > "The unexpected strength of the S&P 500 was a key contributor to Warren’s victory. Despite trading for a high multiple of earnings and facing an elevated level of risk, the S&P 500 performed in-line with historical averages." So the "unexpected strength" came from performing "in-line with historical averages"?
- RobAtticus 9y ago
  He's saying that since the S&P is at a higher multiple, you'd expect returns to diminish since presumably its too high to keep growing quickly (and, potentially, turn into a bear/down market). So by performing at average, its actually out-performing what you'd expect given the conditions. (Of course that's the theory, clearly the market isn't solely governed by its multiple and risk level)
- trowawee 9y ago
  I mean, he's a hedge fund investor. This is as pure of an illustration of Sinclair's quote about the difficulty of getting someone to understand something when their salary depends on them not understanding it as you're likely to find. Ted Seides wouldn't make the crazy amounts of money he no doubt makes if most people didn't fall for the hedge fund scam.
- conistonwater 9y ago
  I agree with your first comment, but for the second: I think that means that high earnings multiples and elevated risk would normally result in returns lower than, rather than in line with, the average. So he expected what he thought would be the consequence of overvalued markets, but got averages instead. Outside the context of this bet, there's quite a lot out there on whether unusually high multiples (I think the really popular one for discussions is Shiller's CAPE) do or do not predict returns, or whether they predict anything at all. The opinions usually range from "the market says this is the right price for this risk, so it must be right" to "we're going to crash", but it's not all that clear who's right. (I think Shiller's right about overvaluation—I'm not sure what Buffett thinks.) But it's a pretty old topic, so that one is definitely not something he made up just as an excuse.
epistasis 9y ago
>No. 6. Long-term returns only matter if we invest for the long term >Studies of human behavior repeatedly point to the inability of investors to stay the course through tough times. I'd like to see some studies of this with, for example, 401k accounts. Do people actually pull out of indices and into bonds when their the index is really far down? I could see a marked difference in behavior between retirement accounts and taxable accounts; those with taxable accounts are probably going to feel much more like they need to do something, since they had to do something to make the buys in the first place.
- cjlars 9y ago
  To answer your question: Yes, investment flows tend to be trend following, people put money in when the market has been doing well and pull it out when it's been doing poorly. There are macroeconomic reasons for this, since people tend to be cash poor in downturns and cash rich in booms, but there also seems to be psychological 'returns chasing' behavior which hurts the median investor's returns. Here's a source using mutual fund flows, which shouldn't be fundamentally different than ETF fund flows: http://www.businessinsider.com/blackrock-sp-500-vs-equity-fund-flow-2013-4 http://www.businessinsider.com/blackrock-sp-500-vs-equity-fu...
- djrogers 9y ago
  I'm sure the claimed studies are out there, but there's a lot of evidence in the very circumstances of a market crash. Too much supply saturating demand, causing prices to tumble. The supply spikes because so many people start selling...
avisser 9y ago
If anyone was curious about how Berkshire Hathaway did over a similar period: 3 May 2007-3 May 2017 S&P 500: +60% Berkshire Hathaway A (BRK.A): +129% Dude is good.
- tanderson92 9y ago
  Berkshire Hathaway didn't distribute any dividends during this period; many companies in the S&P 500 index did, so this is not a good comparison. The S&P 500 index total return still lost to S&P500 but by a more modest ~29%.
  - rjeli 9y ago
    While we're on the topic, can anyone explain to me the purpose of paying dividends? When I try to look this up, all I get is the definition of a dividend. Wouldn't that money be better going back into the company, increasing its value to the investors the same amount, but now with more capital for innovation/survival? Why do companies incentivize investors to hold their stock?
    - skybrian 9y ago
      The whole point is to make money for the owners. For any individual investor, they can sell, but not the owners as a whole. Buying the stock back when it's undervalued might be a better way to do it, though.
      - firebones 9y ago
        From what I've seen, buybacks are often more about preventing dilution due to share-based compensation; they're effectively a tax-advantaged dividend. However, they can also be a sign of a company that has no better idea for spending their capital, which can indicate a decline in the ROI of their R&D. Could HP and IBM have done better with their cash over the last 10-15 years than buying back stock? Share repurchases seem to obfuscate with plausible deniability whether the intent is to return capital in a tax-advantaged way, or whether there's just a basic lack of faith in investing in new innovations.
stvswn 9y ago
I love this part: >"But the S&P 500 defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return." He must know that 7% is something of a magic number, it's what Jeremy Siegel argued is the steady, annual inflation-adjusted gains for equites for the past 200 years in his seminal book "Stocks for the Long Run," which was written in 1994 and is the foundational argument for passive equity investing ("Irrational Exuberance" and others argue directly against it). The fact that the S&P 500 did 7.1% over 9 years is only "lucky" if you ignore the precise argument that Buffet, Siegel and many others make.
- AnimalMuppet 9y ago
  Not quite. Seides' claim is that, at the start of the period, the S&P 500 was valued at the high end of its historical range. It is somewhat reasonable to expect that it would come down from that high instead of going higher.
  - kbutler 9y ago
    ... and the S&P 500 did go down from that high. Within a year after the bet was made, the S&P 500 crashed, dropping 50% of its value. But the S&P 500 still more than made up the returns to beat the hedge fund.
  - zzalpha 9y ago
    Translation: Even experts can get fooled into thinking they can time the market...
    - kmonsen 9y ago
      He did time the market correctly, and still lost.
      - AnimalMuppet 9y ago
        ... and still claimed that most of the time, he would win.
heymijo 9y ago
"I have learned nothing." - Ted Seides
mifeng 9y ago
> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory." Great Ted, so instead of complaining about why you lost, just make the same bet again at even higher stakes.
- princeb 9y ago
  a martingale betting system is spotted in the wild! as long as he can persist to infinity, he will make money. i don't know if ted can, but i suspect warren is an immortal lizard person of celestial intellect (and wealth).
  - mcguire 9y ago
    Personally, I really hope so.
theprop 9y ago
Strange that he doesn't even mention let alone discuss that the primary reason he lost may just be the reason Buffett originally cited which was the high fees of hedge funds/active management. That in most if not all market conditions, high fees preclude a better average return than index funds. The only reason Seides provided which I found somewhat persuasive was that hedge funds tend to do better in downturns -- this is probably a traditional hedge fund that's actually hedged. I wonder if adding such hedging to an index fund in an automated way would improve performance or not?! Not sure if it's been tested.
- valuearb 9y ago
  Yea, it's actually likely that many investment managers have skills that can beat the market. But it's been proven that the vast majority cannot, after fees. Those that have "skill" have an edge that is so thin that 2% a year evaporates it (mutual funds). With Hedge Funds charging 2% + profit share, it's an even heavier burden. Guys like Buffett that beat the market by 7-10% a year over decades are nearly unicorns in rareness.
  - paulmd 9y ago
    The secret is that Buffett isn't beating the market by 7-10% a year over decades. He's not a hedge fund prodigy, he's a management prodigy. His companies beat the market because he is the antithesis of the quarterly-numbers-driven model of Wall Street. He focuses on fundamentals, long-term value, and having leadership that's on the same page. He makes sure his businesses aren't underspending on fundamentals or overspending on inessentials, and then he gets out of the way. Saying that Buffett "beats the market" is like saying that a sports coach is really good at picking winning teams. His companies outperform the market because Buffett enables them to outperform the market. (on top of that, yes, he's a savvy investor and he's made some ballsy calls - but absent his management I doubt you would see him doing better than the 2% that other actively-managed funds can earn above the market return)
    - adventured 9y ago
      Your information is incorrect. As an investor - not as a manager - Buffett stomped the market for decades prior to the modern concept of Berkshire Hathaway becoming the business model. Numerous other Graham disciples likewise stomped the market over long periods of time. https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... Going further, other well-known value investors applying similar approaches (by their own admission), stomped the market as well. Those include the likes of Phil Fisher and Seth Klarman. The out-performance isn't subtle, it's dramatic, and it takes place over long periods of time.
ouid 9y ago
>"No. 2: Risk matters, eventually" Isn't this exactly backwards??
nabla9 9y ago
There are two main reasons why index funds outperform active funds. 1. Fees. Active funds start as underdogs because of their fees. 2. The distribution of returns in the stock market is very uneven. Just handful of well performing stocks at any moment account make significant gains in market. Index funds pick these winners every time. Active funds start as underdogs even in the stock picking game. Why Indexing Works, Heaton , Polson and Witte, 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262 > The risk of substantial index underperformance always dominates the chance of substantial index outperformance, with the difference being greater the smaller the size of the selected sub-portfolios. It is far more likely that a randomly selected (small) subset of the 500 stocks will underperform than overperform, because average index performance depends on the inclusion of the extreme winners that often are missed in sub-portfolios.
lordnacho 9y ago
Ex fund manager here. Some things about this bet that need to be mentioned: - It should be risk adjusted. No idea how the numbers come out, but what's the sense in comparing the return without the accompanying variance? For example if the S&P has 15% vol over the period but the hedge fund 30%, that factor of two needs to be taken into account somehow. - Management fees of 2% are clearly too high for this day and age. They came about historically when hedge funds were collections of small amounts of money, happy to take large risks. If you're willing to have volatility of 36%, paying 2% a year is going to be different from paying 2% for 12% vol. Part of the reason vol is lower is institutional investors are not HNWs. I used to run a fund that ran 36% vol as a target, and the IIs came to us and said they couldn't present it to their superiors. The explanation that you could just put less capital in didn't seem to resonate with the box checkers. Must be something that Kahnemann and Tversky could illuminate. - I'm not sure the thing about the S&P being unnaturally strong is a valid excuse. If you're a hedge fund, you are free to just do a leveraged play on the S&P, thus beating it if you think it's going up. Same goes for what will inevitably come up, the extraordinarily loose monetary policy following the crisis. Whatever caused the S&P to go up, you could have bet on it. - The bets are against funds-of-funds, which compound fees. You might be paying 2/20 to the underlying funds and 1/10 to the manager of this portfolio. That's a pretty big chunk. Normally what the FoF says to its customers is they have access to funds that others don't, through good relationships gained over years. Though looking at the summary in Buffett's letter it looks like even if you added ~30% for the 10 years of fees to each group, you still wouldn't beat the S&P. But that's just my late night eyeballing, perhaps with the performance fee it would be in the ballpark. - Buffett stipulated it had to be multiple funds-of-funds, probably because this would mean you'd get S&P with costs. What else are a bunch of mainly American hedge funds going to invest in, given you have hundreds of underlying funds? You might get the odd emerging markets fund, but they'll be swamped out by the hundreds of generic funds that just punt some US stocks. Restricting it to funds-of-funds is actually pretty smart, because FoFs are going to tend to be conservative and take a selection from the buffet (yeah I said that). Allowing individual hedge funds might have given a very different result.
- dsacco 9y ago
  Yeah this bet was not a smart one for Ted given the terms. I'd gladly take it with a few slight revisions though: 1) The hedge funds don't have to be "funds-of-funds", and 2) I can choose the hedge funds. But I suspect Buffett wouldn't take that bet. He strikes me as someone who doesn't take bets without knowing pretty well in advance that he'll win. It also sort of alters the claim from "hedge funds as an industry will beat the S&P 500 overall" to "elite hedge funds can consistently beat the S&P 500." But given that he is a fund manager, I have no idea what Seides was thinking trying to claim the former.
nodesocket 9y ago
I'm heading to Omaha tomorrow for my first $BRK shareholder meeting this weeekend. Super excited to hear Warren and Charlie speak and answer questions. Warren just has incredible discipline (way above most people). He does not let emotions get the best of him. All of his decisions and investments are calculated and thoroughly researched. "People who mix their politics up with their investment activity.... I don't think that makes sense." -- Warren Buffett
- deleted 9y ago
  [deleted]
- firebones 9y ago
  The timing of conceding this bet is auspicious. --Signed, another $BRK meeting attendee
tgb 9y ago
> Warren and I have written during the past two years that he will win the bet absent a market crash. Hedge funds tend to significantly outperform in bear markets, as demonstrated in 2008 and 2000-2002. This bet started in January 1st, 2008 shortly before the market crash of 2008. What could Ted Seides mean by bringing this up? It seems to just reinforce Buffet's win.
- spott 9y ago
  I think he is pointing out that if you look at the 2008-2009 timeframe, the hedge funds had a loss of roughly 5-15%, while the S&P500 had a loss of roughly 20%. The hedge funds did better in bear markets... they just don't do well enough in bull markets to make up the difference over a 10 year period with only a single crash. In a theoretical world where modern hedge funds were in business between 2000 and 2009, we might have come to a different conclusion: there were a number of down markets during that time and hedge funds might have been able to do much better.
- isolli 9y ago
  He meant that with a second market crash he might have won.
TheGrassyKnoll 9y ago
> "Although a market crash is highly unlikely in the near future..." Statements like this are just harbingers of doom to me.
stevenj 9y ago
I think it's important to note that Ted's bet was in fund of funds, which require additional fees that would negatively effect his investment return regardless of its performance.
vm 9y ago
OP made a sucker's bet for two reasons: 1. Fees, which he doesn't mention this write up 2. Hedging, which drags performance in up market years. Markets tend to move up over time, so the longer the outlook, the more likely he is to lose.
TheAlchemist 9y ago
Well, this almost 10 year period didn't teach anything to this guy, or, more probable, he's just trying to defend a rigged industry. Basically, he's saying that Warren won by luck, while in truth it wasn't even close. It's worth to state this clearly - the passive index did a 85.4% return up to date, while the five funds did 2.9%, 7.5%, 8.7%, 28.3%, 62.8%. You do the math. If there is one guy in this world that understand how economy and markets work, it's Warren. And he has a ~60 years track record to back this up.
- iaw 9y ago
  His point about the biases of the S&P 500 are valid but his conclusions are not. There's a point where even he acknowledges that hedge funds saw comparable performance to a separate passive fund (MSCI All World I think?). Even if his thesis around the S&P 500's value is correct (which I agree with) it doesn't mean that passive investments as a whole will be outperformed by equivalent hedge funds. I'd be curious to see what the performance of hedge funds that were effectively "US-only" was, my suspicion is that they weren't in line with the S&P further invalidating his conclusions.
  - tanderson92 9y ago
    Comparing to an incorrect benchmark (MSCI All-World) post-facto isn't exactly a get out of jail free card for trailing the benchmark that was known at the time of the bet. It just shows you're pretty desparate for excuses.
jameslk 9y ago
What if (hypothetically) a large majority of investors started investing into index funds? For example, an enormous amount of retail investors are won over by this bet and believe passive investment in index funds will always lead to higher returns. Are there any ramifications of this situation that may cause inefficiencies where investing in hedge funds may lead to better returns over a period of decades? Should we all just dump our money into SPY and VTI now that Warren Buffett has won this bet? Or maybe Ted was just unlucky to take this bet during successive rounds of QE that pushed interest rates to historic lows and perhaps artificially turned more risky assets into the only vehicles for returns?
- mcguire 9y ago
  I have no strong evidence to back this up, but I believe that odds exactly why the price of the S&P500 in terms of price to earnings is so high right now.
  - firebones 9y ago
    If you look at where the money is moving, this is exactly right and it has already happened. Passive management is crushing the inflow numbers. Perhaps this creates opportunities, but maybe not opportunities at scale.
cs702 9y ago
I clicked on the link expecting to read an elaborate version of "I lost the bet because I was wrong," perhaps followed by a detailed inquiry into the facts and reasons that motivated Buffett -- a man with a long history of NOT losing bets -- to take the other side of the bet. That's what one is supposed to do when things go wrong, right? Instead, Mr. Seides lays out in this article six reasons why, despite losing the bet, he's still right. Which begs the question: Why did he agree to the bet in the first place?
imron 9y ago
> defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return I know, past performance is not an indicator of future outcomes, but when talking odds, surely decades worth of data showing historical returns in a similar range, the odds in this case would be skewed towards preferring a continuation of that trend.
james1071 9y ago
There are two separate issues. 1 The expected returns from the two investments. 2 The likley returns at the time the bet was made.
JackPoach 9y ago
Someone is a sore loser.
Ntrails 9y ago
This bet remains the worst possible framing of a question "can hedge funds provide value?". Some do, more don't. Active investing is negative sum so unless you've got some pretty good reasons to believe that the specific active manager [fund] has a market beating methodology then you should not be touching them. Investing in a basically un-curated basket of hedge funds is a bad idea full stop and it was crazy to take the other side.

182 points by greenburger 9y ago

greenburger 9y ago

For bet details: http://longbets.org/362/ http://longbets.org/362/ [edit: grammar]

conistonwater 9y ago
> STAKES $1,000,000 will go to Girls Incorporated of Omaha if Buffett wins, or Friends of Absolute Return for Kids, Inc if Protege Partners, LLC wins. That's one hell of a charity name. Edit: It seems it must be parsed as (Friends of (Absolute Return for Kids)), and good on them that they've renamed it since: https://en.wikipedia.org/wiki/Ark_(charity) https://en.wikipedia.org/wiki/Ark_(charity)
- forgotpwtomain 9y ago
  Also: We Think Girls Are The Greatest Thing Since Sliced Bread... we serve hundreds of girls every day.

rabidonrails 9y ago

Maybe I'm too biased (in Buffett's favor) but this reads like Seides saying: Sure I lost but Buffett only won because he was lucky. >> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory." <--- Reeks of the Gambler's fallacy.

dnautics 9y ago
Gambler's fallacy has to do with independent uncorrelated events. The stock market is no such beast. I have no love for seides, but this is atrocious timing for him. To a certain degree your yield on the s&p depends on timing. I know many people who were hired when the s&p is high and fired when it crashed. For the hoi polloi, i.e. "not Warren Buffett", the s&p is often life-procyclical and they get screwed.
- tanderson92 9y ago
  Atrocious timing? It seems to me that he got supremely lucky. Within the first 14 months of the bet he had the largest bear market in nearly a century. Isn't this where the "risk management" advantage of hedge funds comes in? And he still lost. Oh, and his piece is littered with false comparisons (picking benchmarks post facto despite knowing he'd be compared to the S&P500 index total return) and falsehoods (international stocks, see VTIAX, have provided a positive return over the period he describes); hard to take him seriously at all.
  - kbutler 9y ago
    Exactly this. Seides and Buffet are saying Buffet will win "unless they get a market crash" (the second in the 10-year period). Yes, hedge funds seek to hedge their bets against bear markets, but if you require two major crashes in 10 years to break even with passive investing, the smart money should go elsewhere.
    - spott 9y ago
      The average time between stock market crashes is roughly 8 years... so 2 in 10 isn't outrageous.
      - sweezyjeezy 9y ago
        Yeah but not a sensible bet to take even odds on. It would be about a 20% chance assuming a Poisson distribution (probably entirely false, but you get the point).
- valuearb 9y ago
  Yea, he got the greatest gift he could ever hope for at the beginning of the bet, and couldn't remotely come close to holding that lead. How often in 10 years do you expect a market correction of that size? He's spewing nonsense now because he got caught with his pants down. His livelihood depends on convincing people that "hedge funds" outperform, no facts to the contrary will ever be accepted by him. He will always mark it up to being unlucky. It really was a terrible bet for Ted, because it has heavily publicized his fund of funds incompetence to his customers and potential customers.
gingerbread-man 9y ago
Fallacy could confuse either side of that bet: the gambler's fallacy if he lost, the hot hand fallacy if he won. It seems like he had a reasonable justification for expecting a reversal of fortune in this case-- the US bull market cannot continue forever, and hedge funds traditionally outperform in bear markets and beat the S&P when global markets are stronger than the US.
- valuearb 9y ago
  If he thought he needed the market to produce returns in the bottom 10-20% of it's average decade returns, it was a terrible one, he's a 4-1 or 9-1 dog. Or maybe he thought the market was overvalued and that it was closer to 50-50 that it would have a bad decade. But that's still a 50-50 bet, no big edge for him. And in both cases the reality is that he's giving up 3-4% a year in fees to the index. That's a huge edge for the index, he'd need the worst decade in history to beat that. Anyone who has every analyzed long term hedge fund returns comes away convinced they are terrible. Those fees are just far too high to overcome for 95% of the funds.

gavman 9y ago

> "Comparing hedge funds and the S&P 500 is a little bit like asking which team is better, the Chicago Bulls or the Chicago Bears. Like the Bulls and the Bears in the Windy City, hedge funds and the S&P 500 play different sports." That, to me, is a CRAZY statement to make. Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return. To say that they "play different sports" is at best stretching the truth, at worst a lie. > "The unexpected strength of the S&P 500 was a key contributor to Warren’s victory. Despite trading for a high multiple of earnings and facing an elevated level of risk, the S&P 500 performed in-line with historical averages." So the "unexpected strength" came from performing "in-line with historical averages"?

RobAtticus 9y ago
He's saying that since the S&P is at a higher multiple, you'd expect returns to diminish since presumably its too high to keep growing quickly (and, potentially, turn into a bear/down market). So by performing at average, its actually out-performing what you'd expect given the conditions. (Of course that's the theory, clearly the market isn't solely governed by its multiple and risk level)
trowawee 9y ago
I mean, he's a hedge fund investor. This is as pure of an illustration of Sinclair's quote about the difficulty of getting someone to understand something when their salary depends on them not understanding it as you're likely to find. Ted Seides wouldn't make the crazy amounts of money he no doubt makes if most people didn't fall for the hedge fund scam.
conistonwater 9y ago
I agree with your first comment, but for the second: I think that means that high earnings multiples and elevated risk would normally result in returns lower than, rather than in line with, the average. So he expected what he thought would be the consequence of overvalued markets, but got averages instead. Outside the context of this bet, there's quite a lot out there on whether unusually high multiples (I think the really popular one for discussions is Shiller's CAPE) do or do not predict returns, or whether they predict anything at all. The opinions usually range from "the market says this is the right price for this risk, so it must be right" to "we're going to crash", but it's not all that clear who's right. (I think Shiller's right about overvaluation—I'm not sure what Buffett thinks.) But it's a pretty old topic, so that one is definitely not something he made up just as an excuse.

epistasis 9y ago

>No. 6. Long-term returns only matter if we invest for the long term >Studies of human behavior repeatedly point to the inability of investors to stay the course through tough times. I'd like to see some studies of this with, for example, 401k accounts. Do people actually pull out of indices and into bonds when their the index is really far down? I could see a marked difference in behavior between retirement accounts and taxable accounts; those with taxable accounts are probably going to feel much more like they need to do something, since they had to do something to make the buys in the first place.

cjlars 9y ago
To answer your question: Yes, investment flows tend to be trend following, people put money in when the market has been doing well and pull it out when it's been doing poorly. There are macroeconomic reasons for this, since people tend to be cash poor in downturns and cash rich in booms, but there also seems to be psychological 'returns chasing' behavior which hurts the median investor's returns. Here's a source using mutual fund flows, which shouldn't be fundamentally different than ETF fund flows: http://www.businessinsider.com/blackrock-sp-500-vs-equity-fund-flow-2013-4 http://www.businessinsider.com/blackrock-sp-500-vs-equity-fu...
djrogers 9y ago
I'm sure the claimed studies are out there, but there's a lot of evidence in the very circumstances of a market crash. Too much supply saturating demand, causing prices to tumble. The supply spikes because so many people start selling...

avisser 9y ago

If anyone was curious about how Berkshire Hathaway did over a similar period: 3 May 2007-3 May 2017 S&P 500: +60% Berkshire Hathaway A (BRK.A): +129% Dude is good.

tanderson92 9y ago
Berkshire Hathaway didn't distribute any dividends during this period; many companies in the S&P 500 index did, so this is not a good comparison. The S&P 500 index total return still lost to S&P500 but by a more modest ~29%.
- rjeli 9y ago
  While we're on the topic, can anyone explain to me the purpose of paying dividends? When I try to look this up, all I get is the definition of a dividend. Wouldn't that money be better going back into the company, increasing its value to the investors the same amount, but now with more capital for innovation/survival? Why do companies incentivize investors to hold their stock?
  - skybrian 9y ago
    The whole point is to make money for the owners. For any individual investor, they can sell, but not the owners as a whole. Buying the stock back when it's undervalued might be a better way to do it, though.
    - firebones 9y ago
      From what I've seen, buybacks are often more about preventing dilution due to share-based compensation; they're effectively a tax-advantaged dividend. However, they can also be a sign of a company that has no better idea for spending their capital, which can indicate a decline in the ROI of their R&D. Could HP and IBM have done better with their cash over the last 10-15 years than buying back stock? Share repurchases seem to obfuscate with plausible deniability whether the intent is to return capital in a tax-advantaged way, or whether there's just a basic lack of faith in investing in new innovations.

stvswn 9y ago

I love this part: >"But the S&P 500 defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return." He must know that 7% is something of a magic number, it's what Jeremy Siegel argued is the steady, annual inflation-adjusted gains for equites for the past 200 years in his seminal book "Stocks for the Long Run," which was written in 1994 and is the foundational argument for passive equity investing ("Irrational Exuberance" and others argue directly against it). The fact that the S&P 500 did 7.1% over 9 years is only "lucky" if you ignore the precise argument that Buffet, Siegel and many others make.

AnimalMuppet 9y ago
Not quite. Seides' claim is that, at the start of the period, the S&P 500 was valued at the high end of its historical range. It is somewhat reasonable to expect that it would come down from that high instead of going higher.
- kbutler 9y ago
  ... and the S&P 500 did go down from that high. Within a year after the bet was made, the S&P 500 crashed, dropping 50% of its value. But the S&P 500 still more than made up the returns to beat the hedge fund.
- zzalpha 9y ago
  Translation: Even experts can get fooled into thinking they can time the market...
  - kmonsen 9y ago
    He did time the market correctly, and still lost.
    - AnimalMuppet 9y ago
      ... and still claimed that most of the time, he would win.

heymijo 9y ago

"I have learned nothing." - Ted Seides

mifeng 9y ago

> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory." Great Ted, so instead of complaining about why you lost, just make the same bet again at even higher stakes.

princeb 9y ago
a martingale betting system is spotted in the wild! as long as he can persist to infinity, he will make money. i don't know if ted can, but i suspect warren is an immortal lizard person of celestial intellect (and wealth).
- mcguire 9y ago
  Personally, I really hope so.

theprop 9y ago

Strange that he doesn't even mention let alone discuss that the primary reason he lost may just be the reason Buffett originally cited which was the high fees of hedge funds/active management. That in most if not all market conditions, high fees preclude a better average return than index funds. The only reason Seides provided which I found somewhat persuasive was that hedge funds tend to do better in downturns -- this is probably a traditional hedge fund that's actually hedged. I wonder if adding such hedging to an index fund in an automated way would improve performance or not?! Not sure if it's been tested.

valuearb 9y ago
Yea, it's actually likely that many investment managers have skills that can beat the market. But it's been proven that the vast majority cannot, after fees. Those that have "skill" have an edge that is so thin that 2% a year evaporates it (mutual funds). With Hedge Funds charging 2% + profit share, it's an even heavier burden. Guys like Buffett that beat the market by 7-10% a year over decades are nearly unicorns in rareness.
- paulmd 9y ago
  The secret is that Buffett isn't beating the market by 7-10% a year over decades. He's not a hedge fund prodigy, he's a management prodigy. His companies beat the market because he is the antithesis of the quarterly-numbers-driven model of Wall Street. He focuses on fundamentals, long-term value, and having leadership that's on the same page. He makes sure his businesses aren't underspending on fundamentals or overspending on inessentials, and then he gets out of the way. Saying that Buffett "beats the market" is like saying that a sports coach is really good at picking winning teams. His companies outperform the market because Buffett enables them to outperform the market. (on top of that, yes, he's a savvy investor and he's made some ballsy calls - but absent his management I doubt you would see him doing better than the 2% that other actively-managed funds can earn above the market return)
  - adventured 9y ago
    Your information is incorrect. As an investor - not as a manager - Buffett stomped the market for decades prior to the modern concept of Berkshire Hathaway becoming the business model. Numerous other Graham disciples likewise stomped the market over long periods of time. https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... Going further, other well-known value investors applying similar approaches (by their own admission), stomped the market as well. Those include the likes of Phil Fisher and Seth Klarman. The out-performance isn't subtle, it's dramatic, and it takes place over long periods of time.

ouid 9y ago

>"No. 2: Risk matters, eventually" Isn't this exactly backwards??

nabla9 9y ago

There are two main reasons why index funds outperform active funds. 1. Fees. Active funds start as underdogs because of their fees. 2. The distribution of returns in the stock market is very uneven. Just handful of well performing stocks at any moment account make significant gains in market. Index funds pick these winners every time. Active funds start as underdogs even in the stock picking game. Why Indexing Works, Heaton , Polson and Witte, 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262 > The risk of substantial index underperformance always dominates the chance of substantial index outperformance, with the difference being greater the smaller the size of the selected sub-portfolios. It is far more likely that a randomly selected (small) subset of the 500 stocks will underperform than overperform, because average index performance depends on the inclusion of the extreme winners that often are missed in sub-portfolios.

lordnacho 9y ago

Ex fund manager here. Some things about this bet that need to be mentioned: - It should be risk adjusted. No idea how the numbers come out, but what's the sense in comparing the return without the accompanying variance? For example if the S&P has 15% vol over the period but the hedge fund 30%, that factor of two needs to be taken into account somehow. - Management fees of 2% are clearly too high for this day and age. They came about historically when hedge funds were collections of small amounts of money, happy to take large risks. If you're willing to have volatility of 36%, paying 2% a year is going to be different from paying 2% for 12% vol. Part of the reason vol is lower is institutional investors are not HNWs. I used to run a fund that ran 36% vol as a target, and the IIs came to us and said they couldn't present it to their superiors. The explanation that you could just put less capital in didn't seem to resonate with the box checkers. Must be something that Kahnemann and Tversky could illuminate. - I'm not sure the thing about the S&P being unnaturally strong is a valid excuse. If you're a hedge fund, you are free to just do a leveraged play on the S&P, thus beating it if you think it's going up. Same goes for what will inevitably come up, the extraordinarily loose monetary policy following the crisis. Whatever caused the S&P to go up, you could have bet on it. - The bets are against funds-of-funds, which compound fees. You might be paying 2/20 to the underlying funds and 1/10 to the manager of this portfolio. That's a pretty big chunk. Normally what the FoF says to its customers is they have access to funds that others don't, through good relationships gained over years. Though looking at the summary in Buffett's letter it looks like even if you added ~30% for the 10 years of fees to each group, you still wouldn't beat the S&P. But that's just my late night eyeballing, perhaps with the performance fee it would be in the ballpark. - Buffett stipulated it had to be multiple funds-of-funds, probably because this would mean you'd get S&P with costs. What else are a bunch of mainly American hedge funds going to invest in, given you have hundreds of underlying funds? You might get the odd emerging markets fund, but they'll be swamped out by the hundreds of generic funds that just punt some US stocks. Restricting it to funds-of-funds is actually pretty smart, because FoFs are going to tend to be conservative and take a selection from the buffet (yeah I said that). Allowing individual hedge funds might have given a very different result.

dsacco 9y ago
Yeah this bet was not a smart one for Ted given the terms. I'd gladly take it with a few slight revisions though: 1) The hedge funds don't have to be "funds-of-funds", and 2) I can choose the hedge funds. But I suspect Buffett wouldn't take that bet. He strikes me as someone who doesn't take bets without knowing pretty well in advance that he'll win. It also sort of alters the claim from "hedge funds as an industry will beat the S&P 500 overall" to "elite hedge funds can consistently beat the S&P 500." But given that he is a fund manager, I have no idea what Seides was thinking trying to claim the former.

nodesocket 9y ago

I'm heading to Omaha tomorrow for my first $BRK shareholder meeting this weeekend. Super excited to hear Warren and Charlie speak and answer questions. Warren just has incredible discipline (way above most people). He does not let emotions get the best of him. All of his decisions and investments are calculated and thoroughly researched. "People who mix their politics up with their investment activity.... I don't think that makes sense." -- Warren Buffett

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firebones 9y ago
The timing of conceding this bet is auspicious. --Signed, another $BRK meeting attendee

tgb 9y ago

> Warren and I have written during the past two years that he will win the bet absent a market crash. Hedge funds tend to significantly outperform in bear markets, as demonstrated in 2008 and 2000-2002. This bet started in January 1st, 2008 shortly before the market crash of 2008. What could Ted Seides mean by bringing this up? It seems to just reinforce Buffet's win.

spott 9y ago
I think he is pointing out that if you look at the 2008-2009 timeframe, the hedge funds had a loss of roughly 5-15%, while the S&P500 had a loss of roughly 20%. The hedge funds did better in bear markets... they just don't do well enough in bull markets to make up the difference over a 10 year period with only a single crash. In a theoretical world where modern hedge funds were in business between 2000 and 2009, we might have come to a different conclusion: there were a number of down markets during that time and hedge funds might have been able to do much better.
isolli 9y ago
He meant that with a second market crash he might have won.

TheGrassyKnoll 9y ago

> "Although a market crash is highly unlikely in the near future..." Statements like this are just harbingers of doom to me.

stevenj 9y ago

I think it's important to note that Ted's bet was in fund of funds, which require additional fees that would negatively effect his investment return regardless of its performance.

vm 9y ago

OP made a sucker's bet for two reasons: 1. Fees, which he doesn't mention this write up 2. Hedging, which drags performance in up market years. Markets tend to move up over time, so the longer the outlook, the more likely he is to lose.

TheAlchemist 9y ago

Well, this almost 10 year period didn't teach anything to this guy, or, more probable, he's just trying to defend a rigged industry. Basically, he's saying that Warren won by luck, while in truth it wasn't even close. It's worth to state this clearly - the passive index did a 85.4% return up to date, while the five funds did 2.9%, 7.5%, 8.7%, 28.3%, 62.8%. You do the math. If there is one guy in this world that understand how economy and markets work, it's Warren. And he has a ~60 years track record to back this up.

iaw 9y ago
His point about the biases of the S&P 500 are valid but his conclusions are not. There's a point where even he acknowledges that hedge funds saw comparable performance to a separate passive fund (MSCI All World I think?). Even if his thesis around the S&P 500's value is correct (which I agree with) it doesn't mean that passive investments as a whole will be outperformed by equivalent hedge funds. I'd be curious to see what the performance of hedge funds that were effectively "US-only" was, my suspicion is that they weren't in line with the S&P further invalidating his conclusions.
- tanderson92 9y ago
  Comparing to an incorrect benchmark (MSCI All-World) post-facto isn't exactly a get out of jail free card for trailing the benchmark that was known at the time of the bet. It just shows you're pretty desparate for excuses.

jameslk 9y ago

What if (hypothetically) a large majority of investors started investing into index funds? For example, an enormous amount of retail investors are won over by this bet and believe passive investment in index funds will always lead to higher returns. Are there any ramifications of this situation that may cause inefficiencies where investing in hedge funds may lead to better returns over a period of decades? Should we all just dump our money into SPY and VTI now that Warren Buffett has won this bet? Or maybe Ted was just unlucky to take this bet during successive rounds of QE that pushed interest rates to historic lows and perhaps artificially turned more risky assets into the only vehicles for returns?

mcguire 9y ago
I have no strong evidence to back this up, but I believe that odds exactly why the price of the S&P500 in terms of price to earnings is so high right now.
- firebones 9y ago
  If you look at where the money is moving, this is exactly right and it has already happened. Passive management is crushing the inflow numbers. Perhaps this creates opportunities, but maybe not opportunities at scale.

cs702 9y ago

I clicked on the link expecting to read an elaborate version of "I lost the bet because I was wrong," perhaps followed by a detailed inquiry into the facts and reasons that motivated Buffett -- a man with a long history of NOT losing bets -- to take the other side of the bet. That's what one is supposed to do when things go wrong, right? Instead, Mr. Seides lays out in this article six reasons why, despite losing the bet, he's still right. Which begs the question: Why did he agree to the bet in the first place?

imron 9y ago

> defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return I know, past performance is not an indicator of future outcomes, but when talking odds, surely decades worth of data showing historical returns in a similar range, the odds in this case would be skewed towards preferring a continuation of that trend.

james1071 9y ago

There are two separate issues. 1 The expected returns from the two investments. 2 The likley returns at the time the bet was made.

JackPoach 9y ago

Someone is a sore loser.

Ntrails 9y ago

This bet remains the worst possible framing of a question "can hedge funds provide value?". Some do, more don't. Active investing is negative sum so unless you've got some pretty good reasons to believe that the specific active manager [fund] has a market beating methodology then you should not be touching them. Investing in a basically un-curated basket of hedge funds is a bad idea full stop and it was crazy to take the other side.