How To Beat Hedge Funds and The Bet Warren Buffett Made

There’s a popular saying among certain crowds on Wall Street. One variation of it goes like this:

“Retail investors are the dumb money. Hedge funds and investment managers are the smart money.”

No one is certain where this phrase started or even how long it’s been around. But one thing is for sure: it’s not true.

Let us explain.

Warren Buffett once made a bet. The winner would get $1 million. Buffett said a standard S&P 500 Index Fund would outperform hedge funds over a 10 year period. A company named Protege Partners decided to take the bet.

8 years later, here’s what that bet looks like:

Screen Shot 2016-08-30 at 8.30.29 AM

The S&P 500 Index Fund, which is basically accessible to anyone, is OBLITERATING hedge funds. As the table above shows, an S&P 500 Index Fund is up 66% since the bet was made while the hedge funds picked by Protege Partners are up about 22%.

So now for the big takeaway.

If you’re an average retail investor, you need to know you aren’t the dumb money. The tools available to you, like an S&P 500 Index Fund or even the ETF $SPY, can be used to crush hedge funds. The table above demonstrates that perfectly and it’s something investors should always be thinking about.


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