The biggest bet on longbets.com: $1,000,000

> Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe the active investors must do about average as well.

Am I missing something or is this obviously wrong as a mathematical argument? There could be a group of active investors who do well, a group of passive investors who do poorly, and the average would be in the middle.

MichaelSalib3• 16 years ago

Most (all?) passive investors buy index funds which perform about as well as the market but are more robust because of their diversity. I suppose it is possible for a passive investor to put their money in very carefully chosen index funds that perform poorly, but the whole point of passive investing is that you believe that you're unlikely to be able to make those sorts of allocations correctly and consistently.

There certainly are active investors who do very well, but I'm not sure if there are any that significantly beat the market over a long enough time frame.

jbooth2• 16 years ago

Buffett's argument wasn't just that active investors don't beat the market over a long enough timeframe (I think some do, he prob agrees).

His argument was that those active investors, minus the fees they charge, won't beat the market over a long timeframe. I agree with him there as well.

martincmartin• 16 years ago

The passive investors are, in effect, copying the active investors. They're investing in the sum of what all the active investors are investing in. So they're return is the average of what the active investors are investing in.

aquateen• 16 years ago

In the poker world, Tom Dwan bet $1M that Phil Ivey couldn't be a vegetarian for one year. Ivey settled after three weeks for $150k.

Devilboy• 16 years ago

I wonder what a $150k steak tastes like

Nwallins• 16 years ago

49 weeks worth of steak, presumably...

mkramlich2• 16 years ago

I'd never know. I'd enjoy the taste of a $50 steak and wine, and put the rest into a Tesla Roadster. :)

whatwhatwhat• 16 years ago

I'm from Omaha... and my money is on Buffet

mbateman• 16 years ago

I don't understand how this bet proves anything either way if we can't see the adjudication methodology.

keytweetlouie• 16 years ago

What if you die before then does the money come out of the loser's estate?

mkramlich2• 16 years ago

Rule of thumb: in the absence of having strong, trustable reasons to do otherwise, always bet the way Mr. Buffet bets.

jrockway• 16 years ago

A better bet is, "will the hedge fund have a profitable year in which the market overall is down". If you invest in the market as a whole, you need to be prepared to be in for 30+ years, especially with the levels of volatility we have seen in the last 10-20 years.

A hedge fund can make trades that don't depend on the direction of the market, which means you can access your invested capital even in a down year. Buying an index fund doesn't afford you that opportunity -- if you bought the S&P500 index before the whole mortgage meltdown, you would be out a lot of money now. In 30 years, you probably will have made your 10% per year, though.

(One thing to note, though, is that as an average investor, the trades that make hedge funds / investment banks a lot of money are really not available to you. To make any non-directional money these days, you need cheap capital, and nobody's going to give that to you. I know what sorts of trades pay my salary at an investment bank, and if I made them myself, I would lose money. That's the reality.)

sireat• 16 years ago

This article: http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.... provides more information.

Previously, I thought that it was a sure thing for Buffett to win, because I thought portfolio implied maybe 20+ hedge funds, but standing opposite S&P500 are only 5 hedge funds(preapproved by both Buffett and Protege).

Protege has a chance (if i was a betting man, I'd give 1:5 odds they would win).

However, Buffett's bet was smarter, because it also wins if something negative happens to the hedge fund industry as a whole politically and we can see that happening already. Nobody is going to nerf S&P 500.

Also from the article, each side contributed 320k and put the money into zero coupon bonds with maturity in 10 years(ie 640k now -> 1mil in ten years), which will go to winner's charity.

The biggest bet on longbets.com: $1,000,000

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