The one-million dollar bet

This article was drafted on the day of the Grand National – and perhaps you’re one of the people who fancies a little flutter on the races. We have absolutely no problem with that, and hope you were lucky. But we’ve talked before about the risk of gambling with your money.

So here, at last, is a definitive answer to the one-million dollar question of whether it’s better to invest based on discipline and diversification or prediction and timing.

If you’re a regular reader, it will come as no surprise to you to learn what we think*. But first, here’s the evidence.

In 2007, Warren Buffett and Ted Seides made a bet. (Ted is a hedge fund consultant in New York; we’re sure you know who Warren Buffett is.)

To measure the merits of hedge funds relative to low-cost passive investment, they bet $1 million on the outcome of their own strategy after 10 years, from 1 January 2008 to 31 December 2017.

Seides selected five hedge funds, and Buffett selected the S&P 500 Index. Halfway through the period, the sum he’d invested in bonds was converted to Berkshire Hathaway shares.

By mid-2017, Seides had fallen so far behind that he conceded defeat. However, he did point out that long-run returns don’t matter if the strategy is abandoned along the way.

The final amount is reported to be in excess of $2.2 million, with the stakes going to Buffett’s preferred charity.

Advocates of active management often claim that superior managers can be identified in advance by conducting a thorough assessment of their skills. But this 10-year challenge offers additional evidence that investors will find this approach fails to improve their results.

In case you were wondering, we believe the secret of successful investing is:

  • Diversifying
  • Choosing low-cost funds
  • Ignoring the media hype
  • Forgetting about active management
  • Sticking to your long-term plan

We’re happy that the million-dollar bet proves us right.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100