Years before Portfolios with Purpose created its stock-picking contest for charity, Warren Buffett made a bigger, and longer-term bet. Back in 2008, Buffett bet Ted Seides of Protégé Partners, LLC that hedge funds could not outcompete the stock market as a whole. The winner would donate $1 million of Buffett’s money to the charity of their choice.
While Buffett is playing for Girls, Inc. of Omaha, Seides has chosen Absolute Returns for Kids, which focuses on education in the U.S., U.K., and India, child protection in Eastern Europe, and health in Southern Africa. So either way, it’s Buffett’s money that’s being donated, and the money will be going to support children, but for Buffett, it’s really about drawing attention to his assertion that high-priced hedge funds aren’t worth the additional money customers pay for the service.
Buffett, who placed his bet on an S&P index fund, was trailing for the first four years, but his low overhead compared to the five undisclosed hedge funds Seides put his money on allowed him to catch up in 2012, and take a pretty big lead in 2013. His fund is now up 43.8 percent, compared to just 12.5 percent for the hedge fund after all the fees were taken out, leaving Seides with some major catching up to do.
The fund Buffett created to pay the bet has fared even better though; the Treasury bond he bought for $320,000 in 2008 would have cashed out at $1 million at the conclusion of the bet in 2018, but low interest rates yielded better returns, and since the bond had almost reached the $1 million mark, both sides agreed to move the money into Berkshire Hathaway stock last year. As a result, the money that will be donated is now estimated at $1.3 million. If Berkshire Hathaway’s stock continues to appreciate even at a fraction of the rate it did in 2013, the total gift could end up being over $2 million. Then maybe both organizations will get $1 million? After all, this was never really about the money, especially considering that Buffett is worth an estimated $58.5 billion, and he plans on donating at least half of that to charity.