billallred.net

Fascinating news from money.cnn.com: Warren Buffett reaffirms his distaste for sophisticated investment vehicles, this time putting up some serious cash to back it up. Well, serious for me. Probably not for him.

The Sage has bet Protege Partners, a fund of hedge funds, $1 million (sort of - more on that in a minute) that, net of all fees, the Vanguard S&P 500 index fund will beat the average of 5 funds of hedge funds chosen by Protege over the next 10 years. Although it’s not disclosed, you can assume that Protege itself is one of those 5. The bet took effect on Jan. 1 of this year. Each party put up $320,000 to purchase a Treasury bond that will be worth $1 million at the end of the bet, at which time the money goes to the winner’s charity. This is apparently a standing offer that Buffett made in May 2006.

Seems to me that Buffett is just toying with these guys. “Sure, I’ll take your bet. Knock yourself out, kid.” As for Protege, they already got their money’s worth. Not everyone gets to make a bet with Warren Buffett, let alone a big one. However, if Buffett wins (60% likely according to Buffett, 15% likely according to Protege) I’m sure it won’t be reported. It’s no longer news when Buffett makes the right bet. Now if Protege wins, then they’ll make a big deal out of it. But this bet is all about the PR value right now, not financial performance 10 years from now. In that respect, Protege’s money was well spent.

As intriguing as hedge funds are, I’m an index fund guy - I subscribe to Mark Cuban’s theory that the best investment is made with an information advantage, which you and I don’t have in public companies. However, it’s simply not practical to invest your meager savings in startups where you can have an information advantage. That leaves index funds as the most reasonable investment. Fees, transaction costs, and management expenses drain most mutual funds and hedge funds of the really good returns. I’m with Warren on this one.