In "The Breakthrough Company" I spend a chapter detailing how important it is for a company to place strategically timed bigger bets in order to break through to extraordinary performance. Warren Buffett has just made public the fact that he is channeling his inner Jimmy the Greek and placing a very big bet. The Oracle of Omaha is party to a $1million wager that index funds will outperform professionally chosen hedge funds over a 10-year period when manager's hefty costs are included.
Buffett put up $320,000 against $320,000 from Protégé Partners LLC, purchasing a zero-coupon Treasury bond that will be worth $1million in ten years. The bet has been placed through The Long Now Foundation and winnings will be donated to charity. Protégé has selected 5 hedge funds to track in the contest with the S&P 500.
Buffett is simply putting his money where a lot of mouths and no small amount of empirical evidence have been since Burton Malkeil published the landmark A Random Walk Down Wall Street in 1973. It was in that work that he fired the famous shot heard 'round the financial world when he contended, "A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts." (For more about index funds, see The Only Guide to Investing an Entrepreneur Will Ever Need.)
The logic has always been that if you have the prescience to consistently isolate winners, that ringing I hear in the background must be Nostradamas calling to get your read on his latest predictions. Buffet asserts, "A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds." Protégé contends, "Hedge funds have the flexibility to invest both long and short, they do not set out to beat the market. Rather, they seek to generate positive returns over time regardless of the market environment." Protégé argues top hedge funds have surpassed market returns net all fees.
Now the money is on the table, and the fun begins. Buffett has entered the world of John Anthony, Mathew McConaughey's alter ego in "Two For The Money." The major differences being, Buffett probably isn't sporting six-pack abs, and he won't have to go back to work in the boiler room if he loses the bet.