Capital Allocators – Inside the Institutional Investment Industry
Episode: WTT: A New Twist on an Old Bet with Buffett
Release Date: July 9, 2025
Host: Ted Seides

Introduction: Revisiting an Iconic Bet

In this compelling episode of Capital Allocators, host Ted Seides delves into an intriguing financial wager made nearly two decades ago with legendary investor Warren Buffett. The discussion sets the stage by recounting the origins and dynamics of the bet, offering listeners a blend of nostalgia and strategic insight.

[00:05] Speaker A: "Eighteen years ago, I made a bet with Warren Buffett that pitted hedge funds against the S&P 500."

The Original Bet: Hedge Funds vs. S&P 500

Ted recounts the genesis of the bet, which commenced on a "slow summer day" when he approached Buffett with the idea. The agreement was a charitable 10-year wager comparing the performance of hedge funds to the S&P 500 from January 1, 2008, to December 31, 2017.

[00:15] Ted Seides: "Warren initially assessed his odds of winning at 60%, but wrote in his 2016 annual letter as if victory was preordained."

The bet garnered significant attention when Carol Loomis highlighted it in Fortune magazine, capturing the financial community's interest. Initially, hedge funds seemed poised to win, especially during the tumultuous early years marked by the global financial crisis. However, the subsequent market rally tipped the scales in favor of the S&P 500, leading Buffett to claim victory in his 2016 annual report.

Reflections on Outcome and Relationships

Ted reflects on the unexpected outcomes and the relationships forged through the bet. Despite his initial optimism, Ted acknowledges an overestimation of hedge funds' prospects.

[00:45] Ted Seides: "I initially called it 85% in our favor. Lots of outcomes could have happened, but only one did."

He introduces the concept of resulting, a behavioral bias where decisions are judged solely on outcomes rather than the decision-making process, citing Annie Duke.

The bet also facilitated numerous connections with prominent figures in the investment world, including:

• Todd Combs and Ted Weschler, now key figures at Berkshire Hathaway
• Scott Besant, Treasury Secretary
• Bobby Jain, hedge fund founder
• Patrick O'Shaughy, podcast star
• Brent Beshore, Permanent Equity founder
• Steve Galbraith, leading to Berkshire honoring Jack Bogle

A particularly memorable moment was meeting Charlie Munger at Berkshire's 2017 annual meeting, where Munger humorously dismissed the bet.

[02:30] Ted Seides: "Charlie Munger stereotypically said, my bet was so stupid."

Financial Impact and Charitable Outcomes

The financial maneuvers surrounding the bet yielded significant benefits:

[03:10] Ted Seides: "Girls Inc. Of Omaha received over $2 million and purchased the Protege House to provide residential support and guidance to its alumni."

By initially splitting a $1 million investment into zero-coupon bonds, which appreciated, Ted and Buffett then strategically sold these bonds to invest in Berkshire Hathaway stock. This move not only secured financial gains but also amplified the charitable impact.

Transition to a New Bet: Private Equity vs. S&P 500

Building on the success and lessons from the first bet, Ted introduces a new wager:

[04:50] Ted Seides: "Private equity versus the S&P 500 comparing a portfolio of North American buyouts to The S&P 500 has important consequences as private equity enters the wealth management channel and seeks to access 401k plans."

He outlines his reasoning, emphasizing that high fees and additional expenses in private equity may hinder its ability to outperform the S&P 500, echoing Buffett's skepticism.

Analyzing the New Bet: Factors and Considerations

Ted provides a thorough analysis of the potential performance of private equity compared to the S&P 500, examining several critical factors:

1. Leverage:
   Private equity employs higher leverage (1.5 times debt to equity) compared to the S&P 500 (0.6 times), potentially boosting returns.

2. Size and Growth Potential:
   Private equity typically invests in smaller companies, which historically have outperformed larger ones, although recent trends show a reversal.

3. Control and Management Alignment:
   Private equity's control over investments allows for better-aligned management incentives, contrasting with the more detached public company structures.

4. Dispersion of Returns:
   The wider variance in private equity returns offers opportunities for outperformance within the asset class.

5. Illiquidity:
   While not directly impacting returns, illiquidity can prevent investors from making impulsive decisions, as supported by Dalbar's analysis showing public investors often underperform due to behavioral biases.

Ted estimates that private equity would need to achieve a 15% gross return over a decade to surpass the S&P 500's projected 10% return, factoring in current interest rates and historical performance trends.

[08:30] Ted Seides: "Assuming a 10% return of the S&P 500 over 10 years, private equity would need to deliver approximately a 15% gross return to beat the index."

He acknowledges the structural advantages of private equity but remains cautious, assigning a 40% probability of private equity outperforming the S&P 500 net of fees.

Future Directions and Community Engagement

Looking ahead, Ted expresses enthusiasm about engaging with podcast guests to identify investment options and potential participants for the new wager. He proposes an ongoing reporting mechanism to track the bet's progress over the next decade, reminiscent of the original bet's enduring impact.

[10:15] Ted Seides: "I'm even more excited to see if any unexpected benefits and connections surface this time around."

Conclusion

Ted wraps up the episode by inviting listeners to engage further with the Capital Allocators community, offering access to past shows and premium content.

Notable Quotes:

• Ted Seides [00:45]: "I initially called it 85% in our favor. Lots of outcomes could have happened, but only one did."
• Ted Seides [02:30]: "Charlie Munger stereotypically said, my bet was so stupid."
• Ted Seides [04:50]: "Private equity versus the S&P 500 comparing a portfolio of North American buyouts to The S&P 500 has important consequences..."
• Ted Seides [08:30]: "Assuming a 10% return of the S&P 500 over 10 years, private equity would need to deliver approximately a 15% gross return to beat the index."
• Ted Seides [10:15]: "I'm even more excited to see if any unexpected benefits and connections surface this time around."

This episode offers a nuanced exploration of investment strategies, behavioral finance, and the intricate dance between different asset classes. Whether you're an institutional investor, finance enthusiast, or simply curious about high-stakes financial bets, Ted Seides provides valuable insights and engaging narratives that illuminate the complexities of the investment world.