Six years ago New York money manager, Protégé Partners, bet one million dollars with Warren Buffett that their hedge fund of funds would outperform the S&P 500 over the next ten year period – net of fees. Well, six years into the bet, Buffett has opened up a sizable lead by more than 30%! While we recognize that there are four years to go on the bet, there are several lessons to be learned thus far:
1. Costs Matter. Buying an index fund (not just the S&P 500) is almost always less expensive. Mutual fund average operating expense is 1.3% vs. less than .50% for an index fund.
2. Don’t blindly follow an all-star manager. Just because someone has the address, corner office, credentials, or billions under management doesn’t necessarily make them a better money manager, although probably just a richer one.
3. Hedge funds and other sexy investment products can put a halt to income distributions and are much harder to liquidate if trouble strikes the markets than those boring index funds.
So, next time you are tempted to buy the sizzle instead of the steak, remember the name Warren Buffett – one of the richest men on the planet.
