Breakout

Betting Like Buffett: What the Oracle’s Million-Dollar Wager Means for You

Jeff Macke
Breakout

It was one of the largest legal wagers in history. Can hedge funds beat the market over a 10-year period? Protege Partners stood on the side of the hedge funds and picked five of what they deemed their best. On the other side was investing legend Warren Buffett, who put his money on a Vanguard S&P 500. The stakes are a cool $1 million.

The bet was placed in 2008, just before one of the worst periods for stocks in the last 80 years. It took five years for either party to get out of the red, but now that they have it's the Oracle of Omaha who's in the lead at the halfway point.

For individual investors the results so far raise questions as to whether or not there's a place in their portfolio for individual stocks. Protege has access to the best of the best in the hedge fund world. If they can't find five funds collectively able to beat the market, what chance do regular Joes have?

Long-time investor, entrepreneur and former investment banker Carol Roth says too much is being read into the wager. "Back when I got into the industry, the word 'hedge' actually meant a hedge," she says. That being the case, she's not surprised that the hedgies beat the market in 2008 and 2009 then lost ground when the environment for stocks improved.

The other lesson Roth takes away is the danger of too much churning in a portfolio. Whether they set out to actually hedge or not, funds are notorious for flipping in and out of positions at a breakneck pace — a practice that's the enemy of long-term performance for most investors.

Citing years of statistical data, Roth points out that the market beats the vast majority of investors over the long haul. She doesn't dismiss active investing out of hand but thinks it needs to be just one part of a nest egg, at lest for those able to take the time to do their homework.

"If you happen to understand stocks well, if you have some insight, I think there are opportunities to make some good trades or long-term bets," she offers. Where most investors get into the weeds is when they start making trades based on egos, rumors and flat-out greed.

Patience. Balance. Diversity. These aren't just terms used to sell investment magazines but are the keys to successful investing over the long haul. Who knows, if you do it right maybe someday you'll be able to place a million-dollar stunt wager just like Buffett and Protege.

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