Financial Literacy

Buffett Beats the S&P 500… and Top Money Managers


“You can win a horse race, but you can’t beat the races.”

– Jesse Livermore

“It is easy to determine that Warren Buffett’s performance was due to his skill in picking stocks. But for more mortal portfolio managers, it is extremely difficult to determine with any degree of confidence whether the superior returns of money managers are due to skill or luck.”

– Jeremy “The Wizard of Wharton” Siegel

At Berkshire Hathaway’s annual shareholders meeting this year, Warren Buffett reported on a 10-year, $1 million bet he had with a group of hedge fund managers.

Protégé Partners chose five top money managers who it argued could beat the market from 2008 to 2017… while Buffett bet that an investment in the unmanaged S&P 500 Index Fund would do better.

The results are in… and they’re “an eye-opener,” as Buffett says.

Below is the annual blow-by-blow from the battle of the Titans. I’ve added a third column showing Berkshire Hathaway‘s (BRK-A) stock performance during this 10-year period.

10-Year Investment Performance

There are three remarkable takeaways from this bet.

First, money managers seem to do a decent job of protecting investors only during a bear market.

Second, during a bull market (nine out of the past 10 years) the money managers failed miserably to keep up with the S&P. As Buffett commented, “The roof fell in.”

Third, Buffett’s own managed fund, Berkshire Hathaway, outperformed both the money managers and the market index. If he had bet against the index, he would have won (though not by much.)

His investment company outperformed the index in seven out of 10 years.

Gold Bugs Beware

Another highlight from this year’s shareholders meeting was the story of an investor from San Francisco who used to speculate in penny mining stocks. His wife talked him into investing in Berkshire Hathaway stock instead.

It was a good move. Penny gold stocks have been a disastrous investment over the long run compared with Buffett’s investment company.

As Buffett himself noted last weekend, “If you had bought gold at the time of Christ and you figure the compound rate on it, it’s a couple tenths of a percent.”

Meanwhile, investing in successful businesses offers the potential of multiple returns. As Buffett himself noted, “Just since 1942, an investment of $10,000 in an index of U.S. stocks would be worth $51 million today!”

An Incredible Money Machine

No doubt Berkshire Hathaway has been a big success. In fact, it’s done substantially better than an index fund most of the time.

If you had invested $10,000 in 1964 when Buffett took over, your investment would be worth $160 million today.

If you had invested $10,000 in 1990, it would be worth $45 million today.

That’s a big “if” – it assumes you stayed fully invested the entire time. Investors are always tempted to take profits along the way.

For some time now, Buffett has warned his shareholders that his conglomerate firm is too big to beat the market, so an index fund is more suitable. Someday he may be right.

Meanwhile, I’m still betting on Buffett’s skills as a money manager.

Good investing,

Mark Skousen

Articles by
Related Articles