Thoughts on Warren Buffett’s 10-Year Bet: Active, Passive—or a Combination

By Robert Bacarella

I haven’t been in the investment business as long as Warren Buffett, but in over forty years of observing the industry I’ve seen a lot—and certainly enough that I’m not surprised Warren Buffett won his 10-year bet that a passive index would outperform a group of hand-selected active managers.

The bet is outlined in Warren Buffett’s most recent annual letter to Berkshire Hathaway shareholders. In a nutshell, Buffett and a fund of hedge funds called Protégé Partners entered a charitable wager about whether a selection of five funds-of-funds would outperform the S&P 500 Index over 10 years. (For details, Read the full letter here. .)

  • As Warren Buffett put it in his letter, “the five funds-of-funds got off to a fast start, each beating the index in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index.”
  • Over the 10-year period, the S&P 500 logged an 8.5% average annual gain. The five funds-of-funds registered annual gains of 2.0%, 3.6%, 6.5%, 0.3% and 2.4%, according to the letter. Warren Buffett won the bet in dramatic fashion.

Put in context, this tremendous disparity isn’t as surprising at it might seem. Consider that, on average, 82% of actively managed U.S. funds have underperformed their benchmarks over the past 15 years. Even worse, large-cap growth managers underperformed 95% of the time.[1]

Those are stark numbers, and they—and the result of Warren Buffett’s 10-year bet—might push more investors away from active and toward passive.

However, we believe active management has an important place, too. We often equate investing to flying a plane. For much of the flight, the pilot has the plane in autopilot—that’s passive investing. But for take-off, landing, and times of turbulence the pilot is very much needed. (Read more: Why We Believe in a Symbiotic Active/Passive Investment Approach.)

In our view, employing a passive component is not a bet against active management, but is instead a strategy to seek a degree of certainty that a portfolio, on at least a portion of its assets, may match the market return. The key consideration, then, is how to incorporate active and/or passive investment management into a successful asset allocation strategy.

At Monetta, we launched the Monetta Core Growth Fund (formerly the Monetta Young Investor Fund) in 2006, not long before the start of Warren Buffett’s 10-year bet. Its mix of active and passive components is approximately 50/50, which is adjusted in the event of unusual situations. Over the same 10-year period covered by Warren Buffett’s bet (ending December 31, 2017), the Fund achieved an average annual return of 12.2%, which equates to a cumulative return on 216.3%. (See performance table below for full historical performance figures.)

The Fund’s 10-year result over the period of Warren Buffett’s bet far outpaces the S&P 500’s average annual return of 8.5%, which equates to 125.8% on a cumulative basis, as reported in Buffett’s letter.

We believe the Fund’s performance supports our view that both active and passive approaches have their merits—and are best applied in symbiotic combination for the opportunity to generate above average market returns.

For more details about the Monetta Core Growth Fund’s history and strategy—and why we strongly believe a synergistic combination of active and passive components is the ideal building block for a long-term portfolio—please click here.

[1] Data from S&P Dow Jones Indices, as of 12/31/16, as reported by CNBC.com: Jeff Cox, April 12, 2017, “Bad times for active managers: Almost none have beaten the market over the past 15 years.”

FundsTicker1Yr3Yr5Yr10YrLifeInception Date
Monetta Core Growth FundMYIFX15.28%10.28%12.72%13.22%11.12%12/12/2006
S&P 500® Index13.99%10.78%13.31%9.49%7.98

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 1-800-241-9772.

Fund performance is tracked against the unmanaged S&P 500® Index (SPX).

Annualized Gross Expense Ratio 1.20%

Source Prospectus dated April 30, 2018. Gross Expense Ratio reflects fees paid indirectly.

Please read the Prospectus carefully before you invest. It contains more complete information about the Monetta Funds, including risks specific to each fund, fees and expenses. A free, hard-copy of the prospectus can be obtained by calling 1-800-241-9772.

Portfolio holdings and composition are subject to change at any time and are not a recommendation to buy or sell any securities.

Mutual fund investing involves risk. Principal loss is possible. The Funds may make short-term investments, without limitation, for defensive purposes, which investments may provide lower returns than other types of investments. The portion of the Monetta Young Investor Fund that invests in underlying ETF’s that track the Index will be subject to certain risks which are unique to tracking the Index. By investing in ETF’s, you will indirectly bear your share of any fees and expenses charged by the underlying funds, in addition to indirectly bearing the principal risks of the funds. Growth-oriented funds may under-perform when growth stocks are out of favor. Please refer to the prospectus for further details. While the funds are no-load, management and other expenses still apply. Concentrated funds may experience greater price volatility.

© 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. The Monetta Core Growth Fund received 3 stars among 1265 for the three-year, 2 stars among 1141 for the five-year, and 5 stars among 825 Large Growth funds for the ten-year period ending 6/30/18.

 Morningstar Risk Rating: An annualized measure of a fund’s downside volatility over a three-, five-, or ten-year period. This is a component of the Morningstar Risk-Adjusted Return. Morningstar Risk is displayed in decimal format. A high number indicates higher risk and low numbers indicate lower risk. In each Morningstar Category, the top 10% of investments earn a High rating, the next 22.5% Above Average, the middle 35% Average, the next 22.5% Below Average, and the bottom 10% Low. Morningstar Return Rating: An annualized measure of a fund’s load-adjusted excess return relative to the return of the 90-day Treasury Bill over a three-, five-, or ten-year period. This is a component of the Morningstar Risk-Adjusted Return. Morningstar Return Rating is derived directly from Morningstar Return. In each Morningstar Category, the top 10% of investments earn a High rating, the next 22.5% Above Average, the middle 35% Average, the next 22.5% Below Average, and the bottom 10% Low. Morningstar Risk and Return Ratings are calculated only for those investments with at least three years of performance history.

 Standard and Poor’s 500® Index is a capitalization-weighted index of 500 stocks. This unmanaged index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941-43 base period. You cannot invest directly in an index.

The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contains this and other important information about the investment company, and may be obtained by calling 1-866-964-4683, or visiting www.younginvestorfund.com. Read it carefully before investing.

Monetta Financial Services, Inc. is the adviser to the Monetta Funds. The Monetta Funds are distributed by Quasar Distributors, LLC.

Following the link to this article will take you out of the Monetta Funds website. The Monetta Funds website is not affiliated with, sponsored by, or endorsed by any 3rd party website. The Monetta Funds are not responsible for, nor can guarantee the accuracy of, information on the third party site.