Warren Buffett’s Strange Bet
Posted on Monday, June 9th, 2008 | In Current Market News, Stocks to WatchAlmost anything Warren Buffett does attracts attention. A bet for a million dollars certainly qualifies!
Background
For some time, Warren Buffett has expressed skepticism about hedge fund performance beating the broad market averages. He has frequently offered to bet a million dollars that a basket of ten hedge funds would not beat the market.
Protégé Partners LLC has taken up the challenge. Carol Loomis, a journalist close to Buffett, broke the story today. It will take ten years to setttle the bet, which involves each side putting up $320,000 to buy zero-coupon treasuries. The stake, held by a firm specializing in such long-term bets (who knew?!), will be worth a million dollars in ten years.
Mr. Buffett’s Unusual Position
Warren Buffett, about whom we have written fondly and frequently, rejects the efficient market hypothesis. We wrote about his opinions and included some typically colorful quotations in this piece from two years ago. He famously notes that he would be selling pencils on a street corner if markets were efficient.
In fact, all of us in the investment management business expect to beat the market averages by a wide margin. If not, how could we justify charging a fee?
Our Conclusion
Surely Mr. Buffett does not believe that he is the only manager who can beat the market. He must be doing one of two things.
First, he could be shooting at a very narrow window. He might agree that others can generate marginal advantages, but not enough to overcome the fees charged by hedge funds.
Second, he could just be generating some publicity and money for some good charities. After all, he is giving nearly all of his money away anyhow, so why not stimulate more charitable interest. It is a good way to use his high profile for the greater good.
And Protégé? We wish them well. We would take their side of the bet. In fact, we would make the bet ourselves, but our advertising budget is not big enough!
Last 5 posts by Jeffrey Miller
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 About Jeffrey Miller (http://www.oldprof.typepad.com)
Jeffrey A. Miller, Ph.D. is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. In 1987 Jeff began work for market makers at the Chicago Board Options Exchange. His approach included finding anomalies in the standard option pricing models and developing new forecasting techniques. Merging these quantitative techniques with specific company analysis, Jeff also generated trading ideas from sell-side analyst reports. Through his years of experience in trading options, futures and equities, Jeff has come to be regarded as an expert in interpreting the effect of news on the markets and individual stocks. Jeff has served as a forensic expert in several cases involving such issues. He has also written a series of papers on investment management, describing both quantitative methods and those related to behavioral economics. |
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