On the long bets website, Warren Buffet has wagered $1 million against Protege Partners, LLC saying that their mutual funds and hedge funds are a bad investment that won’t outperform the S&P 500. The exact bet is:

“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.”

Buffet’s reasoning is as follows:

…passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

I agree with Buffet and think he will easily win this one. What do you think?

[Click here to see the bet]

[Click here to read an article on Fortune about the bet]

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Header photograph by !!!! scogle

Story via boing boing

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The Motley Fool has an interesting article on how, if you are in your 20s, you can save 20,000 USD and through the magic of compound interest turn it into 1,000,000 USD by the time you retire.

[Click here to read The One-Year $1 Million Challenge]

Another personal finance blogger has conducted an interview with a burglar to find out where the best places to hide your valuables are. From the interview:

I had quite the interesting conversation this weekend with a person who happened to be a former burglar. It was great timing because I was wondering if something like the skid mark underwear for hiding money would really work. I also figured that if you wanted to know the best place to hide your money from a burglar, a former burglar was the person to ask.

“It doesn’t matter how clever you think you are or where you hide it in your house, if I have enough time, I would be able to find where you stash your valuables,” he said bluntly. He then explained that what was much more important than the actual place where you hide your valuables is that you understand a burglar’s motivations. Basically, he has two:

1. To steal your money and valuables
2. To get out of the house as quickly as possible with these goods

Aside from the useful, practical advice the interviews give, it’s also very interesting to see how your precious home looks from the perspective of someone breaking in.

[Click here for part 1]

[Click here for part 2]

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Header photograph by Christina Snyder

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