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You bet?

 

Bets placed at Long Bets, a site created in 1996 by Jeff Bezos, Amazon’s founder and CEO, are subject to two criteria: a minimum period of two years and must concern matters of social or scientific importance. A number of ideas can be found at this site that can sometimes be a bit far-fetched: “By 2030, commercial passengers will routinely fly in pilotless planes“, “By 2018 the Euro (€) will not be the legal currency of France, Italy and Germany” or “At least one human alive in the year 2000 will still be alive in 2150“. Should the prediction be realized, the loser pays to the winner’s preferred charity at the end of the period the amount owed (a minimum stake of US$200… but no maximum).

In 2007, Warren Buffett launched a bet for €500,000 dollars, the 362nd on the site: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

Ted Seides, a fund manager, courageously accepted the bet. Much to his chagrin: nine years later the performance of the S&P500 on the period had reached 85.4% or an annual return of 7.1%. As for the hedge funds, the average annual return barely reached… 2.2%. It would thus take a historic market crash before the end of the year to reverse the situation against Warren Buffett.

In February, in his annual letter to Berkshire Hathaway investors, beloved Warren already introduced a note of jubilation from a believer who sees the market forces and the American model triumph against the brilliant minds of the hedge fund industry.

However, his bet began in the worst possible way for him: after one year, the flagship US equity index, swept away by the market crisis of 2008, lost 37%. However the spectacular bull market that has continued since then has left no chance to the hedge fund managers.

When he launched his bet, Warren Buffett demonstrated the good sense for which he is legendary. He knows that on average, the S&P500 increases nearly 7% a year1 over a long period. He is also not unaware of the fact that the hedge fund industry, not satisfied in simply multiplying promises to safeguard performances (the hedge fund of Ted Seides – he has subsequently left and who took on the bet– is called Protégé Partners) also inflated under this pretext the costs charged to the investor.

In summary, the Oracle of Omaha2 reintroduces risk as an essential driver of performance in the face of an industry that thought it could cleverly make people believe that it was better to lose a little systematically than accept the risk of a short-term loss to achieve a long-term gain.

For this wonderful initiative with considerable media potential, Mr. Buffett highlighted the principle that we will never cease to remind ourselves: time is the best ally of the investor. He also demonstrated that a judicious investor knows how to stay the course over his investment horizon, despite the potential occurrence of opposing winds. Storms at times violent, but always passing.

To this we would add an “in-house” conviction to that of Warren Buffett’s: over a longer period, active management creates more value than passive management. An assertion that is even more true if one excludes years when the economy was propped up by central banks that we have just gone through. Let us then bet in our turn that just as it did over the previous 10 years3, Echiquier Agressor will outperform its benchmark index over the next 10 years!

 

Didier Le Menestrel

With the complicity of Marc Craquelin

Sources: Bloomberg, Standard & Poor’s
2 Warren Buffett’s nickname.
3 Aggregate performances of the funds vs. MSCI Europe NR between 02/01/2007 and 02/01/2017 : 49.9% vs. 29.6%.