
Ted Seides Concedes Bet with Warren Buffett - greenburger
https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett
======
gavman
> "Comparing hedge funds and the S&P 500 is a little bit like asking which
> team is better, the Chicago Bulls or the Chicago Bears. Like the Bulls and
> the Bears in the Windy City, hedge funds and the S&P 500 play different
> sports."

That, to me, is a CRAZY statement to make. Both ETFs and hedge fund are
financial funds that a person considers putting their money in with the
intention of maximizing their return. To say that they "play different sports"
is at best stretching the truth, at worst a lie.

> "The unexpected strength of the S&P 500 was a key contributor to Warren’s
> victory. Despite trading for a high multiple of earnings and facing an
> elevated level of risk, the S&P 500 performed in-line with historical
> averages."

So the "unexpected strength" came from performing "in-line with historical
averages"?

~~~
spinchange
>Both ETFs and hedge fund are financial funds that a person considers putting
their money in with the intention of maximizing their return. To say that they
"play different sports" is at best stretching the truth, at worst a lie.

They're playing different strategies. If you're a defense-driven team you play
to win primarily be keeping the other team (call them the black swans) from
scoring. To bring it out of metaphor, it's about _risk-adjusted_ maximum
return.

If you're an offense-driven team you're trying to put more points on the
board. The S&P 500 is a decidedly long bet on 100%, large cap, primarily
western corporate equities.

>So the "unexpected strength" came from performing "in-line with historical
averages"?

Hedge fund guys are usually bears and as such they've successfully predicted 9
of the last 5 recessions. They're perpetually prepared for or waiting for
history to be proven wrong. It is within that context that they are seeking a
maximum return (and justification for high fees).

~~~
prewett
But as an investor, _I 'm_ not playing different sports. I'm looking to
maximize returns while minimizing losses. A defensive team and an offensive
team may have different strategies but their goal is the same: win the game.

Are you saying that "risk-adjusted maximum return" is essentially (rate of
return, std. deviation), and that hedge funds are offering a lower rate of
return in exchange for a lower std. deviation? Like how Treasury bonds offer
(1%, 0)? I'm no hedge fund expert, but I've always assumed hedge fund claim to
get higher rate of return than the S&P 500 through the brilliance of their
active management (for which you pay them gobs of money). And in this
experiment, over 10 years, the deviation of the S&P 500 compared to its
expected average was about 0, and their returns (net fees) was about 25% the
S&P 500. So even if the S&P 500 had less than average returns it would have
still trounced the hedge funds.

~~~
eximius
Maximizing returns while minimizing losses is, ultimately, a meaningess
phrase.

What you mean is maximizing returns under some specific risk acceptance. That
risk acceptance is different between hedge funds and other funds. You choose
the fund that matches the game YOU are playing.

------
mifeng
> "My guess is that doubling down on a bet with Warren Buffett for the next 10
> years would hold greater-than-even odds of victory."

Great Ted, so instead of complaining about why you lost, just make the same
bet again at even higher stakes.

~~~
princeb
a martingale betting system is spotted in the wild!

as long as he can persist to infinity, he will make money.

i don't know if ted can, but i suspect warren is an immortal lizard person of
celestial intellect (and wealth).

~~~
mcguire
Personally, I really hope so.

------
rabidonrails
Maybe I'm too biased (in Buffett's favor) but this reads like Seides saying:
Sure I lost but Buffett only won because he was lucky.

>> "My guess is that doubling down on a bet with Warren Buffett for the next
10 years would hold greater-than-even odds of victory." <\--- Reeks of the
Gambler's fallacy.

~~~
dnautics
Gambler's fallacy has to do with independent uncorrelated events. The stock
market is no such beast. I have no love for seides, but this is atrocious
timing for him. To a certain degree your yield on the s&p depends on _timing_.
I know many people who were hired when the s&p is high and fired when it
crashed. For the hoi polloi, i.e. "not Warren Buffett", the s&p is often
_life-procyclical_ and they get screwed.

~~~
tanderson92
Atrocious timing? It seems to me that he got supremely lucky. Within the first
14 months of the bet he had the largest bear market in nearly a century. Isn't
this where the "risk management" advantage of hedge funds comes in? And he
still lost.

Oh, and his piece is littered with false comparisons (picking benchmarks post
facto despite knowing he'd be compared to the S&P500 index total return) and
falsehoods (international stocks, see VTIAX, have provided a positive return
over the period he describes); hard to take him seriously at all.

~~~
kbutler
Exactly this. Seides and Buffet are saying Buffet will win "unless they get a
market crash" (the second in the 10-year period).

Yes, hedge funds seek to hedge their bets against bear markets, but if you
require two major crashes in 10 years to break even with passive investing,
the smart money should go elsewhere.

~~~
spott
The average time between stock market crashes is roughly 8 years... so 2 in 10
isn't outrageous.

~~~
sweezyjeezy
Yeah but not a sensible bet to take even odds on. It would be about a 20%
chance assuming a Poisson distribution (probably entirely false, but you get
the point).

------
theprop
Strange that he doesn't even mention let alone discuss that the primary reason
he lost may just be the reason Buffett originally cited which was the high
fees of hedge funds/active management. That in most if not all market
conditions, high fees preclude a better average return than index funds.

The only reason Seides provided which I found somewhat persuasive was that
hedge funds tend to do better in downturns -- this is probably a traditional
hedge fund that's actually hedged. I wonder if adding such hedging to an index
fund in an automated way would improve performance or not?! Not sure if it's
been tested.

~~~
valuearb
Yea, it's actually likely that many investment managers have skills that can
beat the market. But it's been proven that the vast majority cannot, after
fees. Those that have "skill" have an edge that is so thin that 2% a year
evaporates it (mutual funds). With Hedge Funds charging 2% + profit share,
it's an even heavier burden.

Guys like Buffett that beat the market by 7-10% a year over decades are nearly
unicorns in rareness.

~~~
paulmd
The secret is that Buffett _isn 't_ beating the market by 7-10% a year over
decades. He's not a hedge fund prodigy, he's a management prodigy.

His companies beat the market because he is the antithesis of the quarterly-
numbers-driven model of Wall Street. He focuses on fundamentals, long-term
value, and having leadership that's on the same page. He makes sure his
businesses aren't underspending on fundamentals or overspending on
inessentials, and then he gets out of the way.

Saying that Buffett "beats the market" is like saying that a sports coach is
really good at picking winning teams. His companies outperform the market
because Buffett enables them to outperform the market.

(on top of that, yes, he's a savvy investor and he's made some ballsy calls -
but absent his management I doubt you would see him doing better than the 2%
that other actively-managed funds can earn above the market return)

~~~
adventured
Your information is incorrect.

As an investor - not as a manager - Buffett stomped the market for decades
prior to the modern concept of Berkshire Hathaway becoming the business model.

Numerous other Graham disciples likewise stomped the market over long periods
of time.

[https://www8.gsb.columbia.edu/articles/columbia-
business/sup...](https://www8.gsb.columbia.edu/articles/columbia-
business/superinvestors)

Going further, other well-known value investors applying similar approaches
(by their own admission), stomped the market as well. Those include the likes
of Phil Fisher and Seth Klarman. The out-performance isn't subtle, it's
dramatic, and it takes place over long periods of time.

~~~
kmonsen
I think beating the market was way easier in earlier times because the markets
were less efficient. These days everyone have data and watch metrics.

~~~
valuearb
Metrics are useless without philosophical and psychological commitment to the
process. Many mediocre value investors can do valuations all day, understand
moats, and then allow tons of biases to cloud their thinking and panic at the
worst times. Then there's the guys who do valuations, then look at the charts
to pick entry/exit point s, as if they can predict price action. With so many
people doing it wrong, is there any reason to doubt the market is still
inefficient?

Buffett has never used computers. He reads financial reports. He doesn't want
to know the market price until he's estimated a valuation, so he doesn't bias
his decision. He's not staring at the tape or CNN so he doesn't get wound up
to make knee jerk decisions. He sits around and reads and learns.

------
lordnacho
Ex fund manager here. Some things about this bet that need to be mentioned:

\- It should be risk adjusted. No idea how the numbers come out, but what's
the sense in comparing the return without the accompanying variance? For
example if the S&P has 15% vol over the period but the hedge fund 30%, that
factor of two needs to be taken into account somehow.

\- Management fees of 2% are clearly too high for this day and age. They came
about historically when hedge funds were collections of small amounts of
money, happy to take large risks. If you're willing to have volatility of 36%,
paying 2% a year is going to be different from paying 2% for 12% vol. Part of
the reason vol is lower is institutional investors are not HNWs. I used to run
a fund that ran 36% vol as a target, and the IIs came to us and said they
couldn't present it to their superiors. The explanation that you could just
put less capital in didn't seem to resonate with the box checkers. Must be
something that Kahnemann and Tversky could illuminate.

\- I'm not sure the thing about the S&P being unnaturally strong is a valid
excuse. If you're a hedge fund, you are free to just do a leveraged play on
the S&P, thus beating it if you think it's going up. Same goes for what will
inevitably come up, the extraordinarily loose monetary policy following the
crisis. Whatever caused the S&P to go up, you could have bet on it.

\- The bets are against funds-of-funds, which compound fees. You might be
paying 2/20 to the underlying funds and 1/10 to the manager of this portfolio.
That's a pretty big chunk. Normally what the FoF says to its customers is they
have access to funds that others don't, through good relationships gained over
years. Though looking at the summary in Buffett's letter it looks like even if
you added ~30% for the 10 years of fees to each group, you still wouldn't beat
the S&P. But that's just my late night eyeballing, perhaps with the
performance fee it would be in the ballpark.

\- Buffett stipulated it had to be multiple funds-of-funds, probably because
this would mean you'd get S&P with costs. What else are a bunch of mainly
American hedge funds going to invest in, given you have hundreds of underlying
funds? You might get the odd emerging markets fund, but they'll be swamped out
by the hundreds of generic funds that just punt some US stocks. Restricting it
to funds-of-funds is actually pretty smart, because FoFs are going to tend to
be conservative and take a selection from the buffet (yeah I said that).
Allowing individual hedge funds might have given a very different result.

~~~
dsacco
Yeah this bet was not a smart one for Ted given the terms. I'd gladly take it
with a few slight revisions though:

1) The hedge funds don't have to be "funds-of-funds", and

2) I can choose the hedge funds.

But I suspect Buffett wouldn't take that bet. He strikes me as someone who
doesn't take bets without knowing pretty well in advance that he'll win.

It also sort of alters the claim from "hedge funds as an industry will beat
the S&P 500 overall" to "elite hedge funds can consistently beat the S&P 500."
But given that he is a fund manager, I have no idea what Seides was thinking
trying to claim the former.

~~~
RockyMcNuts
It was Seides's idea to make it funds of funds and he could choose them -

[http://archive.fortune.com/2008/06/04/news/newsmakers/buffet...](http://archive.fortune.com/2008/06/04/news/newsmakers/buffett_bet.fortune/index.htm)

5 hedge funds I'm not sure would make a lot of sense, too small a number to
diversify, funds wind down.

The hedge funds were winning for the first few years with the crisis. A
straight up stock market is not great for the hedge fund side.

Also worth noting that Buffett is an active manager and claims he could beat
the S&P by a large margin if he was managing a smaller portfolio. And he's
said the efficient market theory is dumb and makes his job easier. He tells
people to put their money into index funds and then does the opposite. From
his perspective he's talking his own book, if there is another Warren Buffett
level talent out there, no need to tell everyone to find the best competition
and back him, might as well tell people they're wasting their time, just buy
the index.

~~~
dsacco
There are comparable talents to Warren Buffett, and Seides could have chosen
them. If Jim Simons wasn't retired, I'd happily give up the legal right to
invest in the S&P 500 ever again just to invest with him if that was somehow a
requirement.

Instead, Seides did...whatever this silly attempt was. I get that the "fund of
hedge funds" clause was his idea, but it was stupid.

I use the word "stupid" unironically, fully self-aware of potential Dunning-
Kruger, and I reiterate - there was nothing sensible about his taking the bet
at those terms. It was never a defensible position that hedge funds as an
aggregate industry outperform the market - maybe before the turn of the
century, but not after the market became saturated with every Tom Dick and
Larry with a shingle outside their doors.

Even if it fundamentally changes the goal of the bet, Seides should have had
different terms if he really wanted to win.

~~~
firebones
I'm interested: with Jim Simons, is it some acumen you believe in, some method
he employs, or some connections/stature that leads good deals to his door?

For instance, with Buffett, it seemed his stature, historical perspective, and
_means_ allowed him to invest $5B in Goldman Sachs at the near height of
panic, under terms that very few were able to get.

(Caveat: I don't know anything about Simons, but I'm very curious about the
basis for your claim/offer, knowing that in the HN crowd, you have a lot of
industry experience.)

~~~
dsacco
I'm aware of what you're saying about Buffett (he is essentially an excellent
and influential business magnate, not just an excellent investor), but it
doesn't apply to Simons. He's a mathematician (Chern-Simons theorem), and his
investing methodology is utterly different from Buffett's.

Simons' firm, Renaissance Technologies, doesn't do value investing. They were
one of the first hedge funds to do quantitative financial modeling. I suspect
a lot of what they do is market making instead of purely directional trading,
but it's hard to know since the fund is incredibly secretive. Simons' business
connections or acumen in the traditional sense have nothing to do with the
fund's success; it's entirely about the strategy they employ.

~~~
firebones
Thanks for the clarification and explanation.

------
tgb
> Warren and I have written during the past two years that he will win the bet
> _absent a market crash_. Hedge funds tend to significantly outperform in
> bear markets, as demonstrated in 2008 and 2000-2002.

This bet started in January 1st, 2008 shortly _before_ the market crash of
2008. What could Ted Seides mean by bringing this up? It seems to just
reinforce Buffet's win.

~~~
spott
I think he is pointing out that if you look at the 2008-2009 timeframe, the
hedge funds had a loss of roughly 5-15%, while the S&P500 had a loss of
roughly 20%. The hedge funds did better in bear markets... they just don't do
well enough in bull markets to make up the difference over a 10 year period
with only a single crash.

In a theoretical world where modern hedge funds were in business between 2000
and 2009, we might have come to a different conclusion: there were a number of
down markets during that time and hedge funds might have been able to do much
better.

------
TheAlchemist
Well, this almost 10 year period didn't teach anything to this guy, or, more
probable, he's just trying to defend a rigged industry.

Basically, he's saying that Warren won by luck, while in truth it wasn't even
close. It's worth to state this clearly - the passive index did a 85.4% return
up to date, while the five funds did 2.9%, 7.5%, 8.7%, 28.3%, 62.8%. You do
the math.

If there is one guy in this world that understand how economy and markets
work, it's Warren. And he has a ~60 years track record to back this up.

~~~
iaw
His point about the biases of the S&P 500 are valid but his conclusions are
not. There's a point where even he acknowledges that hedge funds saw
comparable performance to a separate passive fund (MSCI All World I think?).

Even if his thesis around the S&P 500's value is correct (which I agree with)
it doesn't mean that passive investments as a whole will be outperformed by
equivalent hedge funds. I'd be curious to see what the performance of hedge
funds that were effectively "US-only" was, my suspicion is that they weren't
in line with the S&P further invalidating his conclusions.

~~~
tanderson92
Comparing to an incorrect benchmark (MSCI All-World) post-facto isn't exactly
a get out of jail free card for trailing the benchmark that was known at the
time of the bet. It just shows you're pretty desparate for excuses.

------
cs702
I clicked on the link expecting to read an elaborate version of "I lost the
bet because I was wrong," perhaps followed by a detailed inquiry into the
facts and reasons that motivated Buffett -- a man with a long history of NOT
losing bets -- to take the other side of the bet. That's what one is supposed
to do when things go wrong, right?

Instead, Mr. Seides lays out in this article six reasons why, despite losing
the bet, he's still right.

Which begs the question:

Why did he agree to the bet in the first place?

------
stvswn
I love this part: >"But the S&P 500 defied the odds and rewarded investors
with a historically normal 7.1 percent nine-year annualized return."

He must know that 7% is something of a magic number, it's what Jeremy Siegel
argued is the steady, annual inflation-adjusted gains for equites for the past
200 years in his seminal book "Stocks for the Long Run," which was written in
1994 and is _the_ foundational argument for passive equity investing
("Irrational Exuberance" and others argue directly against it).

The fact that the S&P 500 did 7.1% over 9 years is only "lucky" if you ignore
the precise argument that Buffet, Siegel and many others make.

~~~
AnimalMuppet
Not quite. Seides' claim is that, at the start of the period, the S&P 500 was
valued at the high end of its historical range. It is somewhat reasonable to
expect that it would come down from that high instead of going higher.

~~~
zzalpha
Translation: Even experts can get fooled into thinking they can time the
market...

~~~
kmonsen
He did time the market correctly, and still lost.

~~~
AnimalMuppet
... and still claimed that most of the time, he would win.

------
avisser
If anyone was curious about how Berkshire Hathaway did over a similar period:

3 May 2007-3 May 2017

S&P 500: +60% Berkshire Hathaway A (BRK.A): +129%

Dude is good.

~~~
tanderson92
Berkshire Hathaway didn't distribute any dividends during this period; many
companies in the S&P 500 index did, so this is not a good comparison.

The S&P 500 index _total return_ still lost to S&P500 but by a more modest
~29%.

~~~
rjeli
While we're on the topic, can anyone explain to me the purpose of paying
dividends? When I try to look this up, all I get is the definition of a
dividend. Wouldn't that money be better going back into the company,
increasing its value to the investors the same amount, but now with more
capital for innovation/survival? Why do companies incentivize investors to
hold their stock?

~~~
wbl
Some companies are good at one thing and don't want to expand. They think
investors have better opportunities outside.

~~~
dsacco
Elegantly stated.

------
nodesocket
I'm heading to Omaha tomorrow for my first $BRK shareholder meeting this
weeekend. Super excited to hear Warren and Charlie speak and answer questions.
Warren just has incredible discipline (way above most people). He does not let
emotions get the best of him. All of his decisions and investments are
calculated and thoroughly researched.

"People who mix their politics up with their investment activity.... I don't
think that makes sense." \-- Warren Buffett

~~~
firebones
The timing of conceding this bet is auspicious.

\--Signed, another $BRK meeting attendee

------
greenburger
For bet details: [http://longbets.org/362/](http://longbets.org/362/) [edit:
grammar]

~~~
conistonwater
> _STAKES $1,000,000 will go to Girls Incorporated of Omaha if Buffett wins,
> or Friends of Absolute Return for Kids, Inc if Protege Partners, LLC wins._

That's one hell of a charity name.

 _Edit:_ It seems it must be parsed as (Friends of (Absolute Return for
Kids)), and good on them that they've renamed it since:
[https://en.wikipedia.org/wiki/Ark_(charity)](https://en.wikipedia.org/wiki/Ark_\(charity\))

~~~
forgotpwtomain
Also: _We Think Girls Are The Greatest Thing Since Sliced Bread... we serve
hundreds of girls every day._

------
heymijo
"I have learned nothing." \- Ted Seides

------
ouid
>"No. 2: Risk matters, eventually"

Isn't this exactly backwards??

------
epistasis
>No. 6. Long-term returns only matter if we invest for the long term

>Studies of human behavior repeatedly point to the inability of investors to
stay the course through tough times.

I'd like to see some studies of this with, for example, 401k accounts. Do
people actually pull out of indices and into bonds when their the index is
really far down?

I could see a marked difference in behavior between retirement accounts and
taxable accounts; those with taxable accounts are probably going to feel much
more like they need to _do_ something, since they had to do something to make
the buys in the first place.

~~~
cjlars
To answer your question: Yes, investment flows tend to be trend following,
people put money in when the market has been doing well and pull it out when
it's been doing poorly. There are macroeconomic reasons for this, since people
tend to be cash poor in downturns and cash rich in booms, but there also seems
to be psychological 'returns chasing' behavior which hurts the median
investor's returns. Here's a source using mutual fund flows, which shouldn't
be fundamentally different than ETF fund flows:

[http://www.businessinsider.com/blackrock-sp-500-vs-equity-
fu...](http://www.businessinsider.com/blackrock-sp-500-vs-equity-fund-
flow-2013-4)

------
nabla9
There are two main reasons why index funds outperform active funds.

1\. Fees. Active funds start as underdogs because of their fees.

2\. The distribution of returns in the stock market is very uneven. Just
handful of well performing stocks at any moment account make significant gains
in market. Index funds pick these winners every time. Active funds start as
underdogs even in the stock picking game.

Why Indexing Works, Heaton , Polson and Witte, 2015.
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262)

> The risk of substantial index underperformance always dominates the chance
> of substantial index outperformance, with the difference being greater the
> smaller the size of the selected sub-portfolios. It is far more likely that
> a randomly selected (small) subset of the 500 stocks will underperform than
> overperform, because average index performance depends on the inclusion of
> the extreme winners that often are missed in sub-portfolios.

------
imron
> defied the odds and rewarded investors with a historically normal 7.1
> percent nine-year annualized return

I know, past performance is not an indicator of future outcomes, but when
talking _odds_ , surely decades worth of data showing historical returns in a
similar range, the odds in this case would be skewed towards preferring a
continuation of that trend.

------
jameslk
What if (hypothetically) a large majority of investors started investing into
index funds? For example, an enormous amount of retail investors are won over
by this bet and believe passive investment in index funds will always lead to
higher returns. Are there any ramifications of this situation that may cause
inefficiencies where investing in hedge funds may lead to better returns over
a period of decades? Should we all just dump our money into SPY and VTI now
that Warren Buffett has won this bet? Or maybe Ted was just unlucky to take
this bet during successive rounds of QE that pushed interest rates to historic
lows and perhaps artificially turned more risky assets into the only vehicles
for returns?

~~~
mcguire
I have no strong evidence to back this up, but I believe that odds exactly why
the price of the S&P500 in terms of price to earnings is so high right now.

~~~
firebones
If you look at where the money is moving, this is exactly right and it has
already happened. Passive management is crushing the inflow numbers.

Perhaps this creates opportunities, but maybe not opportunities at scale.

------
vm
OP made a sucker's bet for two reasons: 1\. Fees, which he doesn't mention
this write up 2\. Hedging, which drags performance in up market years. Markets
tend to move up over time, so the longer the outlook, the more likely he is to
lose.

------
TheGrassyKnoll
> "Although a market crash is highly unlikely in the near future..."

Statements like this are just harbingers of doom to me.

------
stevenj
I think it's important to note that Ted's bet was in fund of funds, which
require additional fees that would negatively effect his investment return
regardless of its performance.

------
Ntrails
This bet remains the worst possible framing of a question "can hedge funds
provide value?".

Some do, more don't. Active investing is negative sum so unless you've got
some pretty good reasons to believe that the specific active manager [fund]
has a market beating methodology then you should not be touching them.

Investing in a basically un-curated basket of hedge funds is a bad idea full
stop and it was crazy to take the other side.

------
james1071
There are two separate issues.

1 The expected returns from the two investments. 2 The likley returns at the
time the bet was made.

------
JackPoach
Someone is a sore loser.

