My Bet With Warren Buffett – Year One Results

Last year, I made a bet with Warren Buffett that I can select a group of stocks that can “beat the market”. This was inspired by Buffett’s previous bet with a hedge fund manager, which ran for a decade. Buffett made a bet that the hedge funds cannot do better than an index fund. And Buffett won the bet.

I believe that many investors did not understand why Buffett won the bet. There is a lot of idolizing of index funds, when their main weapon is the low cost nature and low turnover. As dividend growth investors, we have known this simple truth for decades, and taken full advantage of it. When you buy individual securities, you have a one time cost, followed by no charges in the future. In today’s day and age, you can purchase stocks for free, and not pay anything to hold on to them. 

The real reason why the index funds did better was because they have lower costs and lower turnover compared to hedge funds. With my bet, I am going to show that you do not need to own index funds. You can do well even with a portfolio of individually selected stocks, as long as certain basic factors are taken into consideration. These factors include keeping costs low, keeping turnover low, and having a long-term focus.

For example, if an index fund held shares in Coca-Cola (KO), they would charge investors a small fee of 0.05% - 0.10%/year to held the stock through the wrapper. If a hedge fund held these shares for you, they would charge you a 2% fee per year, as well as 20% of any profits made on top of that. If the money is held in a fund of hedge funds, you are guaranteed to pay even more in fees. If you add in the potential for behavioral mistakes where you buy and sell Coca-Cola stock at inopportune times,( aka “timing the market”), you will do even worse than the investor who simply bought and held Coca-Cola stock. Of course, if you bought shares of Coca-Cola for your own account, without paying a commission and without paying a fee to anyone to hold the shares for you, you would come out ahead.

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Disclaimer: I am not a licensed investment adviser, and I am not providing you with individual investment advice on this site. Please consult with an investment professional before you invest ...

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