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.
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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