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I've probably said this before on HN, but something that tickles me about this entire story is that Buffett himself did not get to where he is by just holding t

I've probably said this before on HN, but something that tickles me about this entire story is that Buffett himself did not get to where he is by just holding the SP500. But yet this story gets trotted out at the water cooler every once in a while as if this is the source of his wealth, and that it'd behoove us to do the same. Except Buffett and Munger made their money on picking individual stocks and making WSB-style-yolo-bets on them. Or doing classic acquisition/PE stuff (Geico, See's, etc). The other thing that always catches me off guard about this story (as a late millennial) is how Index/ETF investing was not a common thing when this bet was made! Which is crazy to me but all this advice that media (traditional and social alike) that is made to seem timeless was not a clear-cut obvious answer in the early 2000s. Which makes sense when you consider the fact that these ETFs are actually fairly recent phenomenons.

dmoy 3y ago
ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people
- pests 3y ago
  > SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?
  - dmoy 3y ago
    Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
    - dmoy 3y ago
      In other words, it is expertly crafted tech (legal) debt to the tune of $500 billion dollars
    - pests 3y ago
      Oh thanks. I love this stuff! Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? "The option must be exercised before the end of the period ending 21 years after the death of the last survivor of all the lineal descendants of his Majesty King Charles III who have been born before the date of this agreement."
      - dmoy 3y ago
        > Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Yea that's the problem with unit investment trusts. > Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? I can hazard a guess - it was cheap for them to make an amendment to change from 25 yrs to named-person+20, and it would have been expensive for them to figure out how to do a dynasty thing. So they kicked the can probably 90 years down the road for cheap. Newer ETFs, from what I gather, don't have this problem at all. So presumably the "real" fix down the road will be to restructure in the proper legal entity, not a UIT.
voxl 3y ago
so in other words he had money and got lucky with one of his gambles
- quartesixte 3y ago
  Well, I grossly oversimplified what Berkshire Hathaway does but yes he had money and kept making really good informed gambling decisions.
  - VBprogrammer 3y ago
    If you have a better model for the outcome on a Sport than the bookmakers you can make money gambling against them. The reason this doesn't work in practice is that bookmakers will simply reduce your stake limits, to the point that it's a waste of time, if you beat them consistently. There are fewer problems like this in the stock market. However, getting a better model than the players in the market is arguably more difficult. However, with the resources of Berkshire you can do things which a retail investor couldn't dream of, stuff like using satellite imagery to approximate performance. Or paying the CFOs latest squeeze for information (or at least the same but laundered through a 3rd party).
    - quartesixte 3y ago
      I guess a good way to extend the sports betting model analogy is that Buffett’s moves are so large + controlling seats on boards is equivalent to sports players fixing games in response to bets made on them? Buffett wants stock to go up, he can tell the company to take actions to do so. Something individual retail traders (or most funds for that matter) cannot do. As a layperson, I always wonder: is there some equivalent of the Heisenberg uncertainty principle at play in the market? There is no way to make an observation (in this case, a trade) without altering the very thing your are observing (the market).
FredPret 3y ago
People act like investing is a solved problem. Everybody just pile their money into the same index funds. What could go wrong? Rich investors got that way by doing a ton of legwork and taking huge gambles.
- deleted 3y ago
  [deleted]
refurb 3y ago
Yeah, if your goal is not to get good returns on your investments, but rather becomes on of the richest people on earth, yeah! You should: - buy an insurance company - pick individual companies and buy controlling shares so you get board seats and control over the company is run - cross your fingers that you’re one of 1000? 10,000? 1,000,000 where it turns out? If not, don’t do thatz
- tim333 3y ago
  I only know of one person who copied Buffett by buying insurance companies and value investing the float and he did well too, if not quite as smoothly as Buffett. https://wealthymatters.com/2012/05/23/prem-watsa-the-canadian-warren-buffett/ https://wealthymatters.com/2012/05/23/prem-watsa-the-canadia...
bombcar 3y ago
Buffet also says he can’t replicate his success now because his fund is too large, that he’s basically an index fund now. It’s much easier to get a 10x return on a million dollars than it is on a trillion dollars.

dmoy 3y ago

ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people

pests 3y ago
> SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?
- dmoy 3y ago
  Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
  - dmoy 3y ago
    In other words, it is expertly crafted tech (legal) debt to the tune of $500 billion dollars
  - pests 3y ago
    Oh thanks. I love this stuff! Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? "The option must be exercised before the end of the period ending 21 years after the death of the last survivor of all the lineal descendants of his Majesty King Charles III who have been born before the date of this agreement."
    - dmoy 3y ago
      > Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Yea that's the problem with unit investment trusts. > Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? I can hazard a guess - it was cheap for them to make an amendment to change from 25 yrs to named-person+20, and it would have been expensive for them to figure out how to do a dynasty thing. So they kicked the can probably 90 years down the road for cheap. Newer ETFs, from what I gather, don't have this problem at all. So presumably the "real" fix down the road will be to restructure in the proper legal entity, not a UIT.

voxl 3y ago

so in other words he had money and got lucky with one of his gambles

quartesixte 3y ago
Well, I grossly oversimplified what Berkshire Hathaway does but yes he had money and kept making really good informed gambling decisions.
- VBprogrammer 3y ago
  If you have a better model for the outcome on a Sport than the bookmakers you can make money gambling against them. The reason this doesn't work in practice is that bookmakers will simply reduce your stake limits, to the point that it's a waste of time, if you beat them consistently. There are fewer problems like this in the stock market. However, getting a better model than the players in the market is arguably more difficult. However, with the resources of Berkshire you can do things which a retail investor couldn't dream of, stuff like using satellite imagery to approximate performance. Or paying the CFOs latest squeeze for information (or at least the same but laundered through a 3rd party).
  - quartesixte 3y ago
    I guess a good way to extend the sports betting model analogy is that Buffett’s moves are so large + controlling seats on boards is equivalent to sports players fixing games in response to bets made on them? Buffett wants stock to go up, he can tell the company to take actions to do so. Something individual retail traders (or most funds for that matter) cannot do. As a layperson, I always wonder: is there some equivalent of the Heisenberg uncertainty principle at play in the market? There is no way to make an observation (in this case, a trade) without altering the very thing your are observing (the market).

FredPret 3y ago

People act like investing is a solved problem. Everybody just pile their money into the same index funds. What could go wrong? Rich investors got that way by doing a ton of legwork and taking huge gambles.

deleted 3y ago
[deleted]

refurb 3y ago

Yeah, if your goal is not to get good returns on your investments, but rather becomes on of the richest people on earth, yeah! You should: - buy an insurance company - pick individual companies and buy controlling shares so you get board seats and control over the company is run - cross your fingers that you’re one of 1000? 10,000? 1,000,000 where it turns out? If not, don’t do thatz

tim333 3y ago
I only know of one person who copied Buffett by buying insurance companies and value investing the float and he did well too, if not quite as smoothly as Buffett. https://wealthymatters.com/2012/05/23/prem-watsa-the-canadian-warren-buffett/ https://wealthymatters.com/2012/05/23/prem-watsa-the-canadia...

bombcar 3y ago

Buffet also says he can’t replicate his success now because his fund is too large, that he’s basically an index fund now. It’s much easier to get a 10x return on a million dollars than it is on a trillion dollars.