5 ms·

I’m not sure it was considered common sense when the bet was made. And when it settled there were various claims that Buffet got lucky in that stocks just went

I’m not sure it was considered common sense when the bet was made. And when it settled there were various claims that Buffet got lucky in that stocks just went up over the 10 years – perhaps he wouldn’t have won if there was some kind of crash. I’m not claiming he was wrong but I’m not sure one can really reduce it to those few points as if it makes it all obvious.

stouset 3y ago
> And when it settled there were various claims that Buffet got lucky in that stocks just went up over the 10 years It’s funny because that streak of luck just seems to keep happening for most 10 year periods.
- nkurz 3y ago
  It's a little less funny if you look at the inflation adjusted numbers: https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat... There have been quite a few 10-year and longer spans where the S&P 500 doesn't beat inflation. Did you realize that if you had invested in 1965 it would have taken you until 1990 to beat inflation? And that if you had invested at the peak in 2000, it would have taken you until 2015? Even apart from inflation, there's some recent research which suggests that historically the stock market as a whole just hasn't performed as well as most people think. This paper was submitted by the author a few days ago but got no discussion here: https://news.ycombinator.com/item?id=38835832 https://news.ycombinator.com/item?id=38835832. I'm not saying you're wrong, and I too hope something has changed, but do realize you might be assuming without sufficient evidence that the recent past is normal behavior. By historical standards, 2008 to 2022 really was an anomalous bull run.
  - deleted 3y ago
    [deleted]
  - hhs 3y ago
    > By historical standards, 2008 to 2022 really was an anomalous bull run. And interestingly, the rise of intangible assets over time: https://anderson-review.ucla.edu/boom-of-intangible-assets-felt-across-industries-and-economy/ https://anderson-review.ucla.edu/boom-of-intangible-assets-f...
  - sega_sai 3y ago
    The statement about 1965 is not correct if you take into account dividends. The longest periods of being down (in real terms) is 1973-1985, 2000-2013, 1937-1945, 1916-1925 ( https://observablehq.com/@tcgarvin/shiller-sp500 https://observablehq.com/@tcgarvin/shiller-sp500 )
    - tdullien 3y ago
      I graduated from high school in 2000, and sold my first company to Google in 2011, insisting on cash and not stock given the performance of the market through my entire adult life ;)
      - bombcar 3y ago
        The brilliant play is to be like the elves and say both yea and nay. 50/50 and either way you can look brilliant!
    - nkurz 3y ago
      Thank you for the correction. I had mistakenly thought that the chart was total returns rather than just index price, but looking closer I think you are right.
  - refurb 3y ago
    You're ignoring dividends.
  - matsemann 3y ago
    Most people don't invest a single lump sump, but keep investing over time. So even if there is a dip in a 10 year period and it's "only" back to start after those 10 years, all the money one invested during the dip are now in the plus.
  - lotsofpulp 3y ago
    > By historical standards, 2008 to 2022 really was an anomalous bull run. Why leave out 2023?
    - nkurz 3y ago
      Because I meant "through to the beginning of 2022", with the bulk of 2022 not being included in the run. 2023 was definitely up, but whether it will be interpreted as a continuation of the previous run, a brief reprieve, or the jittery start of a new bear market will probably depend on what happens going forward.
chii 3y ago
> I’m not sure it was considered common sense when the bet was made. the academic research even back then was pretty evident that a market cap weighted index fund has been outperforming hedge funds (over long periods like 10 yrs). It's just that index funds way back, prior to vanguard, was not as easily accessible as it is today.
- bombcar 3y ago
  Hedge funds are what their name says - they’re supposed to be a hedge for particular situations, not a main investment. But they became “cool” to own and talk about. Properly used, a hedge fund should just be a drag on your portfolio, but you have it because you’re hedging against risks that others don’t even bother with (like, say, total US collapse).
  - dan-robertson 3y ago
    I think this is a misunderstanding of what a typical hedge fund is. The name comes from the fund hedging its own investments in potentially sophisticated ways. A simple to explain example is a long/short fund: by being good at shorting stocks that won’t go up so much, the fund is insulated from general market crashes (which make the shorts go up) the fund can get more leverage on their long positions. There do exist funds that only short (the best tends to lose a few % a year, iirc) and they would be invested in by other funds instead of picking stocks to short directly.
Zanni 3y ago
The bet was made in 2007. A Random Walk Down Wall Street [0], considered the book that makes the case for index funds over a hand-picked portfolio, was published nearly 25 years earlier (1973) and was sufficiently well-known to qualify as common sense. Though there are still plenty of investment managers that are motivated to claim otherwise. [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
- lelandfe 3y ago
  Befitting this thread’s language, even, Vanguard’s Bogle published Common Sense on Mutual Funds in ‘99.
- fspeech 3y ago
  And Buffett made much larger bets around the same time by selling puts on various stock indexes, with European style contracts and no collateral requirement. Recall collateral calls were what killed AIG.
rTX5CMRXIfFG 3y ago
Intuitively, it seems like he still would have won even if there was a crash—the hedge fund portfolios would then earn even less, because of less diversification and more agent fees.
ryl00 3y ago
> perhaps he wouldn’t have won if there was some kind of crash. But there was! That bet started in 2007, and 2008-2009 saw the biggest percentage drop in the S&P 500 in decades with the GFC. We're talking down to levels last seen in 1996, at the worst of it in March 2009.
- westurner 3y ago
  The S&P500 is a backtesting reference benchmark. You can compare portfolio performance through drawdown periods with backtesting tools. Macroeconomic drawdowns are good times to have cash for acquisitions; instead of free government cheese. "Tear Sheets: Definition and Examples in Finance, Vs. Prospectus" https://www.investopedia.com/terms/t/tearsheets.asp https://www.investopedia.com/terms/t/tearsheets.asp : > While tear sheets date back to the old days when stockbrokers would rip individual pages out of the S&P summary book and send them to current or potential clients, most information is extracted online today. Therefore, any concise representation of a company's business fundamentals could be considered a tear sheet. From https://news.ycombinator.com/item?id=24428206#24429801 https://news.ycombinator.com/item?id=24428206#24429801 : > pyfolio.tears.create_interesting_times_tear_sheet measures algorithmic trading algorithm performance during "stress events" https://github.com/quantopian/pyfolio/blob/4b901f6d73aa02ceb6d04b7d83502e5c6f2e81aa/pyfolio/tears.py#L870 https://github.com/quantopian/pyfolio/blob/4b901f6d73aa02ceb... : >> Generate a number of returns plots around interesting points in time, like [...] From https://news.ycombinator.com/item?id=19111911 https://news.ycombinator.com/item?id=19111911 : > pyfolio/examples/zipline_algo_example.ipynb: https://nbviewer.org/github/quantopian/pyfolio/blob/master/pyfolio/examples/zipline_algo_example.ipynb https://nbviewer.org/github/quantopian/pyfolio/blob/master/p... > "Worst Drawdown Periods" Drawdown > Trading definitions: https://en.wikipedia.org/wiki/Drawdown_(economics)#Trading_definitions https://en.wikipedia.org/wiki/Drawdown_(economics)#Trading_d... awesome-quant > Python > Trading & Backtesting: https://github.com/wilsonfreitas/awesome-quant#trading--backtesting https://github.com/wilsonfreitas/awesome-quant#trading--back... S&P500: https://en.wikipedia.org/wiki/S%26P_500 https://en.wikipedia.org/wiki/S%26P_500
yen223 3y ago
Here's a fun nerd-snipe problem: if we keep the terms of the bet, is there any period in which Buffett would have lost the bet?
otherme123 3y ago
That "luck" always suppose that managed funds would profit on bear markets by shorting, and profit on bull markets by buying. As indexes cannot short, they always lose in a bear market. But in reality managed funds usually freeze or even buy "opportunities" on the falling phase and short on the bottom (e.g. 2009), which causes them serious loses. Also they tend to miss the start of the bull runs (e.g. being bearish until 2011/2012). If you read Kostolany (a contrarian), he talks about how hard it is to short correctly or to buy in the bottom, because going against the grain is hard.
- bombcar 3y ago
  You can usually identify the direction, what is nearly impossibly hard is identifying the time. Also known as “the market can remain irrational longer than you can remain solvent”.
jjice 3y ago
"Common sense" can be subjective here, but Bogle was preaching index funds for quite some time leading up to this. Vanguard and other low cost index providers were doing well, but it is true that it's increased quite a bit over the last few years. In 2007, one of Bogle's more approachable books, "The Little Book of Common Sense Investing" came out, as a reference for this kind of philosophy across other writers: https://en.wikipedia.org/wiki/The_Little_Book_of_Common_Sense_Investing https://en.wikipedia.org/wiki/The_Little_Book_of_Common_Sens...
- bombcar 3y ago
  Bogle basically invented the index fund because he couldn’t work out anything that could beat the index. The “aha” moment is a fund that just copied the index would be quite cheap to manage and maintain. His math always worked but over time the returns have become more and more impossible to ignore. (Interesting for those who follow Bogle he later pointed out an issue with index funds eating the world - what he called manager’s capitalism.)

stouset 3y ago

> And when it settled there were various claims that Buffet got lucky in that stocks just went up over the 10 years It’s funny because that streak of luck just seems to keep happening for most 10 year periods.

nkurz 3y ago
It's a little less funny if you look at the inflation adjusted numbers: https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat... There have been quite a few 10-year and longer spans where the S&P 500 doesn't beat inflation. Did you realize that if you had invested in 1965 it would have taken you until 1990 to beat inflation? And that if you had invested at the peak in 2000, it would have taken you until 2015? Even apart from inflation, there's some recent research which suggests that historically the stock market as a whole just hasn't performed as well as most people think. This paper was submitted by the author a few days ago but got no discussion here: https://news.ycombinator.com/item?id=38835832 https://news.ycombinator.com/item?id=38835832. I'm not saying you're wrong, and I too hope something has changed, but do realize you might be assuming without sufficient evidence that the recent past is normal behavior. By historical standards, 2008 to 2022 really was an anomalous bull run.
- deleted 3y ago
  [deleted]
- hhs 3y ago
  > By historical standards, 2008 to 2022 really was an anomalous bull run. And interestingly, the rise of intangible assets over time: https://anderson-review.ucla.edu/boom-of-intangible-assets-felt-across-industries-and-economy/ https://anderson-review.ucla.edu/boom-of-intangible-assets-f...
- sega_sai 3y ago
  The statement about 1965 is not correct if you take into account dividends. The longest periods of being down (in real terms) is 1973-1985, 2000-2013, 1937-1945, 1916-1925 ( https://observablehq.com/@tcgarvin/shiller-sp500 https://observablehq.com/@tcgarvin/shiller-sp500 )
  - tdullien 3y ago
    I graduated from high school in 2000, and sold my first company to Google in 2011, insisting on cash and not stock given the performance of the market through my entire adult life ;)
    - bombcar 3y ago
      The brilliant play is to be like the elves and say both yea and nay. 50/50 and either way you can look brilliant!
  - nkurz 3y ago
    Thank you for the correction. I had mistakenly thought that the chart was total returns rather than just index price, but looking closer I think you are right.
- refurb 3y ago
  You're ignoring dividends.
- matsemann 3y ago
  Most people don't invest a single lump sump, but keep investing over time. So even if there is a dip in a 10 year period and it's "only" back to start after those 10 years, all the money one invested during the dip are now in the plus.
- lotsofpulp 3y ago
  > By historical standards, 2008 to 2022 really was an anomalous bull run. Why leave out 2023?
  - nkurz 3y ago
    Because I meant "through to the beginning of 2022", with the bulk of 2022 not being included in the run. 2023 was definitely up, but whether it will be interpreted as a continuation of the previous run, a brief reprieve, or the jittery start of a new bear market will probably depend on what happens going forward.

chii 3y ago

> I’m not sure it was considered common sense when the bet was made. the academic research even back then was pretty evident that a market cap weighted index fund has been outperforming hedge funds (over long periods like 10 yrs). It's just that index funds way back, prior to vanguard, was not as easily accessible as it is today.

bombcar 3y ago
Hedge funds are what their name says - they’re supposed to be a hedge for particular situations, not a main investment. But they became “cool” to own and talk about. Properly used, a hedge fund should just be a drag on your portfolio, but you have it because you’re hedging against risks that others don’t even bother with (like, say, total US collapse).
- dan-robertson 3y ago
  I think this is a misunderstanding of what a typical hedge fund is. The name comes from the fund hedging its own investments in potentially sophisticated ways. A simple to explain example is a long/short fund: by being good at shorting stocks that won’t go up so much, the fund is insulated from general market crashes (which make the shorts go up) the fund can get more leverage on their long positions. There do exist funds that only short (the best tends to lose a few % a year, iirc) and they would be invested in by other funds instead of picking stocks to short directly.

Zanni 3y ago

The bet was made in 2007. A Random Walk Down Wall Street [0], considered the book that makes the case for index funds over a hand-picked portfolio, was published nearly 25 years earlier (1973) and was sufficiently well-known to qualify as common sense. Though there are still plenty of investment managers that are motivated to claim otherwise. [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

lelandfe 3y ago
Befitting this thread’s language, even, Vanguard’s Bogle published Common Sense on Mutual Funds in ‘99.
fspeech 3y ago
And Buffett made much larger bets around the same time by selling puts on various stock indexes, with European style contracts and no collateral requirement. Recall collateral calls were what killed AIG.

rTX5CMRXIfFG 3y ago

Intuitively, it seems like he still would have won even if there was a crash—the hedge fund portfolios would then earn even less, because of less diversification and more agent fees.

ryl00 3y ago

> perhaps he wouldn’t have won if there was some kind of crash. But there was! That bet started in 2007, and 2008-2009 saw the biggest percentage drop in the S&P 500 in decades with the GFC. We're talking down to levels last seen in 1996, at the worst of it in March 2009.

westurner 3y ago
The S&P500 is a backtesting reference benchmark. You can compare portfolio performance through drawdown periods with backtesting tools. Macroeconomic drawdowns are good times to have cash for acquisitions; instead of free government cheese. "Tear Sheets: Definition and Examples in Finance, Vs. Prospectus" https://www.investopedia.com/terms/t/tearsheets.asp https://www.investopedia.com/terms/t/tearsheets.asp : > While tear sheets date back to the old days when stockbrokers would rip individual pages out of the S&P summary book and send them to current or potential clients, most information is extracted online today. Therefore, any concise representation of a company's business fundamentals could be considered a tear sheet. From https://news.ycombinator.com/item?id=24428206#24429801 https://news.ycombinator.com/item?id=24428206#24429801 : > pyfolio.tears.create_interesting_times_tear_sheet measures algorithmic trading algorithm performance during "stress events" https://github.com/quantopian/pyfolio/blob/4b901f6d73aa02ceb6d04b7d83502e5c6f2e81aa/pyfolio/tears.py#L870 https://github.com/quantopian/pyfolio/blob/4b901f6d73aa02ceb... : >> Generate a number of returns plots around interesting points in time, like [...] From https://news.ycombinator.com/item?id=19111911 https://news.ycombinator.com/item?id=19111911 : > pyfolio/examples/zipline_algo_example.ipynb: https://nbviewer.org/github/quantopian/pyfolio/blob/master/pyfolio/examples/zipline_algo_example.ipynb https://nbviewer.org/github/quantopian/pyfolio/blob/master/p... > "Worst Drawdown Periods" Drawdown > Trading definitions: https://en.wikipedia.org/wiki/Drawdown_(economics)#Trading_definitions https://en.wikipedia.org/wiki/Drawdown_(economics)#Trading_d... awesome-quant > Python > Trading & Backtesting: https://github.com/wilsonfreitas/awesome-quant#trading--backtesting https://github.com/wilsonfreitas/awesome-quant#trading--back... S&P500: https://en.wikipedia.org/wiki/S%26P_500 https://en.wikipedia.org/wiki/S%26P_500

yen223 3y ago

Here's a fun nerd-snipe problem: if we keep the terms of the bet, is there any period in which Buffett would have lost the bet?

otherme123 3y ago

That "luck" always suppose that managed funds would profit on bear markets by shorting, and profit on bull markets by buying. As indexes cannot short, they always lose in a bear market. But in reality managed funds usually freeze or even buy "opportunities" on the falling phase and short on the bottom (e.g. 2009), which causes them serious loses. Also they tend to miss the start of the bull runs (e.g. being bearish until 2011/2012). If you read Kostolany (a contrarian), he talks about how hard it is to short correctly or to buy in the bottom, because going against the grain is hard.

bombcar 3y ago
You can usually identify the direction, what is nearly impossibly hard is identifying the time. Also known as “the market can remain irrational longer than you can remain solvent”.

jjice 3y ago

"Common sense" can be subjective here, but Bogle was preaching index funds for quite some time leading up to this. Vanguard and other low cost index providers were doing well, but it is true that it's increased quite a bit over the last few years. In 2007, one of Bogle's more approachable books, "The Little Book of Common Sense Investing" came out, as a reference for this kind of philosophy across other writers: https://en.wikipedia.org/wiki/The_Little_Book_of_Common_Sense_Investing https://en.wikipedia.org/wiki/The_Little_Book_of_Common_Sens...

bombcar 3y ago
Bogle basically invented the index fund because he couldn’t work out anything that could beat the index. The “aha” moment is a fund that just copied the index would be quite cheap to manage and maintain. His math always worked but over time the returns have become more and more impossible to ignore. (Interesting for those who follow Bogle he later pointed out an issue with index funds eating the world - what he called manager’s capitalism.)