Why I Lost My Bet With Warren Buffett

You may recall, a while back we wrote about a bet that Warren Buffett made. He was willing to wager anyone that the S&P 500 would beat any five hedge funds over a ten year period. Buffett won his bet. Now we hear from , the hedge fund manager who was on the losing side of this bet.

Seides suggests, rightly so, that price matters:

The higher the price an investor pays for an asset, the less he should expect to earn.

It is said that when you buy a house, you make your money on the purchase, not on the sale.  While it’s not as clear cut in stock market investing, the same principle holds true. You don’t want to buy stocks when they are overvalued, you will make much more money if you buy when prices are cheap.

That said, I don’t believe you should try to time the market. Most people are better off simply buying the S&P 500 or some other broad market index fund. Make periodic investments and over the long haul, you will make money. However, as Seides suggests, if you buy when prices are high, you might not make that much money. Folks who bought in 2007 — just before the financial crisis — saw their portfolios tumble in value during 2008/09. That said, those who bought in 2008 were handsomely rewarded as the markets rebounded.

Mr. Seides suggests that the past decade — the period immediately following that huge decline — has seen enormous gains and now he believes that the market will have lower returns going forward.

So should Seides “double down” on his wager with Buffett? He thinks so:

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. The S&P 500 looks overpriced and has a reasonable chance of disappointing passive investors. Hedge funds mitigate risk in bear markets, while seeking to participate in some of a bull market. Investing in hedge funds is a bet against continuing bull markets; investing in the S&P 500 is a bet on a continuing bull market.

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