In 2007 well-known Berkshire Hathaway chairman and philanthropist Warren Buffett made a most unusual bet with Protegé Partners, a US investment firm that backs hedge funds, and the winner was announced at the beginning of the year.
The original bet was for US$1m, and the wager was whether the stock market would show better returns over the coming decade than hedge funds.
He is also known to be dismissive of the wilder claims of the hedge fund industry, and is sceptical of claims that it can out-perform the stock market.
He has also been scathing about the high fees hedge fund managers charge, and has argued that any returns that they make for clients can often be wiped out by those fees.
The exact terms of the bet in 2007 were that the S&P500 would out-perform an agreed selection of hedge funds over the decade.
In the ten years, Berkshire Hathaway’s S&P500 Index Fund achieved an average annual return of 7.1%.
Over that same period, Protegé’s basket of hedge funds achieved just 2.1%, meaning a huge victory for Buffett.
The contrast between the high-living lifestyle of Wall Street hedgies and modest philanthropist Buffett could scarcely be more pointed.
Where hedgies woo clients over expensive dinners in Manhattan Michelin-starred restaurants, Buffett is a down-home boy from the Midwest, with Berkshire Hathaway based in Omaha, Nebraska.
He still lives in the modest home he bought for US$31,500 in 1958.
Instead of cocktails, Buffett admits to an addiction to Coke, drinking several cans a day.
And rather than lobster thermidor, Buffett favours McDonalds.
Such glorious details emerged in the HBO documentary Becoming Warren Buffett.
When times are good, it’s the Bacon’n’ Egg McMuffin
He always breakfasts at McDonalds on his drive to work.
“I tell my wife, as I shave in the morning, I say, ‘Either $2.61, $2.95 or $3.17.’ And she puts that amount in the little cup by me here [in the car],” he revealed in the programme.
“When I’m not feeling quite so prosperous, I might go with the $2.61, which is two sausage patties, and then I put them together and pour myself a Coke,” he tells director Peter Kunhardt in the documentary.
“$3.17 is a bacon, egg and cheese biscuit, but the market’s down this morning, so I’ll pass up the $3.17 and go with the $2.95.”
Girls just wanna have won
His win is great news for local branch of national charity Girls Inc.
Girls Inc. of Omaha has taken investment advice from Buffett and plans to invest the donation passively, with investment proceeds to cover some expenses for a new halfway house for 16 young women as they leave foster care, said director Roberta Wilhelm.
The charity has already bought a suitable property and is looking to adapt and refurbish it this year, aiming to open it to residents in 2019, she said.
“That’s a really life-changing gift for the girls, and it’s certainly a big change for our agency as well,” Wilhelm told the Wall Street Journal.
In a twist of great fortune for the charity, the US$1m bonus is worth a least double that, thanks to a clause in the original wager.
At the time of the bet, Protegé and Berkshire Hathaway each placed US$320,000 into a zero-coupon Treasury bond that both sides anticipated would be worth US$1m by now.
But it was moved into Berkshire Hathaway’s class B shares when the bond’s value rose faster than expected – the 11,200 shares they bought in 2012 were worth US$2.22m a week ago, said the newspaper.
To put that into context, Girls Inc. of Omaha’s annual budget is about US$2.8m, according to Wilhelm.