In December of 2017, Dividend Growth Investor (DGI) asked me if I wanted to bet against Warren Buffett. Well, kind of. Allow me to explain…
Buffett’s Big Bet
Way back in 2007, Buffett challenged the hedge fund industry to a bet. All the hedge fund managers had to do was beat the S&P 500 over a 10 year period. Buffett didn’t get many takers, but he completely crushed those that took up the challenge. Index funds for the win!
This bet was intriguing (and a little suspicious) because Buffett didn’t put his own Berkshire Hathaway up against the hedge funds. He just picked a simple index. However, this isn’t surprising either because Buffett has voiced strong support for index funds and their creator, Jack Bogle.
My Small Bet
Anyway, DGI asked if I’d take up a similar challenge:
Could I pick a portfolio that beat the S&P 500 over a 10 year period?
Like an idiot, I immediately answered:
I bought a small portfolio ($1,000) of 4 stocks (equally weighted) on the Motif platform which allows me to easily track performance:
- Alibaba: China rising.
- Alphabet: Search! Waymo!! Conquering death!!! Alphabet is one of the most interesting companies in the world.
- Amazon: Remember when it just sold books?
- Berkshire Hathaway: Warren Buffett’s holding company.
And, The Results (So Far…)
Year 1: In 2018, I demolished the index:
Year 2: In 2019 I stayed ahead, but my lead narrowed:
Here is how each stock is doing:
Ironically, Buffett’s own Berkshire Hathaway has been my big loser in the Warren Buffet Bet Portfolio. Berkshire usually does better when Mr. Market struggles, so I give it a pass for now. It will be interesting to see what tricks Warren Buffett has up his sleeve when the next recession rears its ugly head.
Difficult 2020?
My little portfolio is mostly a bet on big tech. While my tech stocks have ruled the world as of late, there is trouble ahead. The immediate risk is government intervention. Some feel that some of the big tech companies need to be broken up. I personally don’t think so, but hell, I’m biased!
Me Versus DGI
DGI and I have vastly different strategies. As a dividend growth investor, DGI is investing in mature businesses. Many of the companies he picked like Coca-Cola, McDonald’s, and 3M are household names that have been around for many decades.
My growth strategy is the opposite. I’m betting that Alphabet (through its Waymo subsidiary) will launch an autonomous car fleet. I’m betting that Amazon will continue to dominate the cloud computing business and who knows what else. Alphabet, Amazon, and Alibaba may look very different by the time this bet is up.
DGI is betting on stasis and I’m betting on disruption. My strategy has more potential upside, but it also much riskier.
Index Funds FTW
I’ve done very well as a stock picker. Here is my biggest portfolio:
But, to win at stocks, you have to win for decades, The oldest holding in this portfolio is Amazon which I bought in March of 2012. While a 723% gain in less than 8 years is freakin’ incredible, I worry about staying power.
The competition isn’t sitting idle. Amazon’s rivals are adapting. Will Facebook be overtaken by TikTok or Snap? Where will Tesla be in 8 years now that almost every other auto manufacturer in the world is working on an electric?
Three-quarters of my Warren Buffett Bet picks are tech and the same quality that made them rise so quickly could also make them fall. That quality is that they are all software companies. Alibaba, Amazon, and Alphabet all make their money in land of 1s and 0s. While all have tremendous size, the next great online shopping experience or search engine may already be in development on a Stanford student’s laptop. Disruption happens fast in tech. Often, we don’t see it coming until it’s too late. In a hilarious example, when the Windows Phone 7 operating system was released, Microsoft held a funeral for the iPhone. Who is dead now?
While I don’t think it is likely, it also wouldn’t surprise me if one of my big tech stocks is a shadow of its former self by the end of this bet. And, this is why I’m an index investor now.
Index investing is self-cleansing which gives it staying power. Winners rise and the losers fall away. Also, indexing doesn’t consume my mental bandwidth (believe me, I need all the help I can get!) as stock picks do.
While I’m happy to have picked some big winners, I’ll continue to sell off a little bit of my stock portfolio every year and buy index funds. This will keep the Capital Gains Monster at bay and allow me to worry a little less.
Ya’ Want More?
You can also find me (and the dinosaurs) at:
- Facebook: 1500 Facebook group and page
- YouTube: My channel is mostly devoted to home improvement, but I have some other material coming up soon too. New video on 1/27!
- Twitter: Spontaneous, often insane, ramblings
- Coworking space: On the surface, MMM HQ is a coworking space. Look a little deeper and you’ll see that we’re really building community. The members of MMM HQ are some of the finest people I know.
Other resources I like:
- Camp FIs are amazingly fun! And, there are two in Colorado this year! Act fast because Week 1 is already sold out.
- Need to learn how to invest? The Simple Path to Wealth is all you need.
- New to FIRE? Need some FIREy guidance? The Fiology workbook is pretty great!
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we had a 58% gain in our individual stock portfolio last year, led by shopify. we beat the index the previous two years too so it will last as long as it lasts. if you don’t enjoy doing the work you’ll probably lose interest and not do so well. looking at your large holdings reminds me of the importance of patience and holding these winners to allow them to keep winning. i’m guessing you didn’t buy them all in one large chunk but added to them over time?
our experiment is to buy one mythical stock (from something we own in our portfolio) per month in $1000 increments and also buy VTI in the same amount. this is the interesting part, carl: we also buy a $1000 in the nasdaq 100 index (QQQ). QQQ has been clobbering the S+P and VTSAX for quite some time now yet it never gets any love from the index crowd. it’s fun to see where it all ends up and who will come out on top. good luck..
freddy smidlap recently posted…FIRE is a Different Path When you Live Rural Part II – Activities and Entertainment
“…looking at your large holdings reminds me of the importance of patience and holding these winners to allow them to keep winning.”
Yep! I’ve had soooo many people tell me over the years that I should sell this or that. One relative told me that when Google hit $300 he would sell it. That would have been a crushing mistake.
“i’m guessing you didn’t buy them all in one large chunk but added to them over time?”
Nope. Most were bought in large chunks.
QQQ, eh!? Have you looked at Vanguard’s version, VGT?
If your goal is to win the challenge, why wouldn’t you switch to an S&P 500 index ETF now and preserve your 5-point lead (assuming expenses are less than 5% over the next 8 years).
One of the rules is that I’d hold the same portfolio for 10 years.
Carl – I was going to tease you for your hubris, but upon further consideration, I think you are auditioning for Future Chairman of Berkshire Hathaway. Next time you’re at the Annual Meeting you should let Charlie know you’re interested. ?
I sure as hell don’t want to go back to work, but I’d pick up the phone if Warren called. 🙂
Stay tuned for Thursday’s article 😉
Perhaps I should just sell everything and load up on Tesla? 😉
What could possibly go wrong?
But as long as we’re on the topic, here is mine!
I have all the love in the world for index funds and am pouring most of our money into them but I have to say my stock portfolio that I started long before I knew much about index funds has performed really well (57% gains) since about 2007. But I buy and hold, and have been doing so in a huge bear market, so it’s not like that’s a big accomplishment.
The true accomplishment of the past decade is the one I shared on Twitter recently: the portfolio I read recently from someone using Wells Fargo Advisors. The WF advisors made a ton of money on trading fees, the investor made literally a few hundred dollars in the past decade. Factoring in inflation, they actually lost money. IN THIS MARKET.
Revanche @ A Gai Shan Life recently posted…Just a little (link) love: I tried, boss edition
I like how well this rests against your post from about 7 years ago about how chasing stocks is a fool’s game:
https://www.1500days.com/chasing-stocks-is-a-fools-game-and-i-am-a-fool/
Ha!
But, as you pointed out, it’s the longterm beat that’s so hard to pull off. And it’s certainly easier in a bull market. Glad it’s just a small part of the portfolio 😉
Chris@TTL recently posted…Index Funds vs Stocks: Which is better?
Haha, yeah… Since then, I sold Apple which was a very bad move. However, I held on to everything else. I guess I’m a super fool!
Enjoyed reading through this, very good stuff, thank you.