Buffett's Ongoing Wager and More

Comments

• Paul

  November 2014

  Thanks for the article, MJG. I don't think it's a huge contrast against the Buffett of yesteryear. I think it's more a bet about probabilities and fees. Two and twenty for the funds and then another two and twenty for Protege (or whatever their take might be) is a really, really hard barrier to overcome vs a low cost index fund.
  
  I believe Buffett originally wanted 10 funds but no one would agree - the more funds, the further the odds are titled in Buffett's favor. Even with this bet, I think he gave himself a 60% chance of being right.
  
  If Buffett were really a indexer at his core, he's be doing the same with Berkshire portfolio.
• rjb112

  November 2014 edited November 2014

  Paul said:

  
  If Buffett were really a indexer at his core, he's be doing the same with Berkshire portfolio.

  It's quite interesting that Buffett in his will, has arranged that his wife's portfolio will be 90% S&P 500 index fund and 10% short term gov't bonds. He could have easily chosen active stock managers to invest the 90% rather than go with the S&P 500 index fund.
  
  Certainly he personally knows some of the best active stock managers, stock pickers and analysts in the country. Why didn't he just select those stock managers to manage the 90% stock portion of his wife's portfolio, rather than going with the index fund?
  He could have specified a separately managed account/privately managed account with any of dozens of the best portfolio managers.
  
  When he disbanded his partnerships, he told his investors to go with Bill Ruane for their stock investments. (Bill Ruane who formed the Sequoia Fund (SEQUX) as the vehicle to handle these investors).
  Why didn't he arrange for something along those lines for his wife, if he felt active management was superior? He could have specified as many managers as he wished.
  
  
  
  
  
• Tampabay

  November 2014

  Confidence in the individual (his wife), no work/decisions to make, market and gov.bond returns...lives happily ever after Warren departs..
• Paul

  November 2014 edited November 2014

  rjb112 said:

  Paul said:

  
  If Buffett were really a indexer at his core, he's be doing the same with Berkshire portfolio.

  It's quite interesting that Buffett in his will, has arranged that his wife's portfolio will be 90% S&P 500 index fund and 10% short term gov't bonds. He could have easily chosen active stock managers to invest the 90% rather than go with the S&P 500 index fund.
  
  Certainly he personally knows some of the best active stock managers, stock pickers and analysts in the country. Why didn't he just select those stock managers to manage the 90% stock portion of his wife's portfolio, rather than going with the index fund?
  He could have specified a separately managed account/privately managed account with any of dozens of the best portfolio managers.
  
  When he disbanded his partnerships, he told his investors to go with Bill Ruane for their stock investments. (Bill Ruane who formed the Sequoia Fund (SEQUX) as the vehicle to handle these investors).
  Why didn't he arrange for something along those lines for his wife, if he felt active management was superior? He could have specified as many managers as he wished.
  
  
  
  
  

  I think Buffett wrote that in his will for a few reasons. First, to convince the common investor that indexing is the way to go. He's a very public figure. He's a master at public relations. He has a vendetta against most of the active managers - calling many of them "takers." On average, he is very much right. There will be a huge cost savings and the average investor will do much, much better following this advice.
  
  Secondly, I think he wants this strategy because, even if he selects the best managers now, if they retire/die/etc, where will his wife go? To the index then? Maybe but there's a good chance she doesn't. He looks at the index as a guaranteed win on the future of America.
  
  Thirdly, I think he believes (as do I) that long term, it's going to be harder and harder to compete against the index. It's by no means impossible. If he felt that it was a fruitless endeavor, he wouldn't have hired Combs and Wechsler. He would have higher Vanguard at like .02% (or less).
  
  I'd say the last reason is due to his assets. I'm not sure how much his wife will get, but let's say a billion. A billion is a lot to invest for one or two fund managers (especially when it's from a third party...who probably has no investment experience). For fun, let's say it's the full $40 billion. If that were the case, what else could you do but index it? That's bigger than any fund (I think) except Bridgewater.
  
• JohnChisum

  November 2014 edited November 2014

  Confidence may not be the right word here. For all we know his wife might have zero knowledge of investing. So why is he putting her into a set it and forget it portfolio?
  
  If he had confidence in his wife then he would leave the money and let her invest it or use it as she pleases.
• rjb112

  November 2014

  
  
  He looks at the index as a guaranteed win on the future of America.
  
  Thirdly, I think he believes (as do I) that long term, it's going to be harder and harder to compete against the index. It's by no means impossible. If he felt that it was a fruitless endeavor, he wouldn't have hired Combs and Wechsler. He would have higher Vanguard at like .02% (or less).
  
  I'd say the last reason is due to his assets. I'm not sure how much his wife will get, but let's say a billion. A billion is a lot to invest for one or two fund managers (especially when it's from a third party...who probably has no investment experience). For fun, let's say it's the full $40 billion. If that were the case, what else could you do but index it? That's bigger than any fund (I think) except Bridgewater.
  

  Yes, he sees the S&P 500 as a long term bet on the success of America, which he is totally convinced of. I believe just last month he advised that an investment in the S&P 500 will do very well over the next 25 years, as long as person didn't try to market time and go in and out of it....as he said, just as the S&P 500 did very well in the past 25 years.
  
  I find it interesting that he specifies the S&P 500, rather than the Total US Stock Market Index.......and also includes no foreign stocks......since he does invest in some foreign stocks in the Berkshire portfolio. It's quite a statement he is making.
  
  I don't believe Buffett will give anywhere remotely close to a billion to his wife. Just enough to ensure her reasonable comfort in retirement, and the rest to charity. Buffett never even gave his kids much money, except for the charities that they run. He's already pledged all his Berkshire Hathaway shares to charities (The Bill and Melinda Gates Foundation mainly, but also his kids' charities). Plus I doubt that his wife has expensive tastes. From what I can tell, Buffett lives a relatively frugal lifestyle
• msf

  November 2014

  Buffett's will leaves cash for his wife, period. No index fund, no bonds. Some of that cash goes into a trust for his wife, some goes directly to her. He advises (but does not require) the trustee to put 90% of the trust's cash into a very low cost S&P 500 fund (such as Vanguard's - his words, not mine), and the rest into short term government bonds.
  
  We don't know what percentage of cash for his wife goes to the trust, and how much directly to her. We don't know what advice, if any, he's given or plans to give his wife for the cash she gets directly.
  
  2013 BH shareholder letter:

  What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)

  The trust is just one bequest. He also left cash directly to his wife. That part of the will wasn't in the shareholder letter. You have to check his interview on CNBC for that info:

  what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee.
• rjb112

  November 2014

  thanks msf.
  
  I think even more significant and revealing is this part that Warren Buffett said. Where he gives his advice for the average person. I'm much more interested in what he advises for the average person than his wife's situation, because his wife is going to be in very good financial condition regardless.....
  
  To which Buffett responded: “Well, I didn’t lay out my whole will. . . . I did explain, because I laid out what I thought the average person who is not an expert on stocks should do. And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. .....the question becomes what does she do with the cash that’s left to her ?Part of it goes outright, part of it goes to a trustee .....But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.”
  
  Amazingly, Warren Buffett thinks "the average person who is not an expert on stocks" should have a portfolio of 90% S&P 500 and 10% short term government bonds.
  
  He did not make many financial planners or registered investment advisors too happy with his 90% S&P 500 and 10% short term gov't bond portfolio recommendation for the average person.