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

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.”