Warren Buffett?s brilliant bets
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Hello, and thanks for downloading the More or Less podcast. We're the program that looks at the numbers in the news and in life. And I'm Tim Harford. Today, we mark the end of an era. The time has arrived where Greg should become...

the chief executive officer of the company at year end and I want to... That's Warren Buffett. He's just announced that he's going to step down as the chief executive of his company, Berkshire Hathaway. Buffett is one of the richest people in the world and is widely held up as the greatest investor who ever lived. He's also been remarkably critical of other masters of the financial universe.

I had a chat with journalist Robin Wigglesworth from the Financial Times, who's the author of the book Trillions, to understand whether Buffett's reputation as an investment genius stands up to scrutiny.

Just give us a brief history of Buffett's company, Berkshire Hathaway. Warren Buffett was already a very successful investor in the 50s and 60s actually, but the big turning point came when he acquired as of a mid-sized textile manufacturer called Berkshire Hathaway in 1956.

He took it over and managed the business, but also turned it into an investment conglomerate, essentially. He used the company as a holding company for all the other investment bets he made. And today, that is a trillion dollar investment conglomerate that owns big stakes in everything from Coca-Cola to Say's Candies and one of America's biggest railway companies. Berkshire Hathaway gave Buffett a vehicle with which he could make massive investments. But that's hardly unique.

What did he do that gave him this stellar reputation as an investor? Well, basically kick ass for, you know, multiple decades. I mean, half a century, really. I remember reading once a book about how Tolkien kind of defined fantasy figures in the minds of the public. Like after he wrote about Gandalf, wizards were kind of old men with hats and staves. And after Warren Buffett, these kind of crystallized what's

investing is. So he basically buys stocks, he holds them for a long run, he reads balance sheets, he figures out what's going to be good and then he generally has more winners than losers and over the years he's compounded just fantastical sums of money and that's why you know he's one of the wealthiest people in the world and by far the person who's probably made the most money out of the world of money in history.

So he is enormously rich, he's enormously successful, and he's done it in a way that seems strangely old school.

It's not reliant on algorithms or trading by the nanosecond or anything like that. In principle, he's doing what anybody could do. He's just doing it very well. Exactly. I mean, I think maybe that's kind of the magic of Warren Buffett, that everybody thinks that maybe I could do what he does. Because essentially, he studies companies, he reads the public accounts, and he buys...

sometimes the entire company, which might be tricky for you and me, or just a slice of them in the stock market of companies he thinks that will do well. And it's just kind of good judgment compounded over an extremely long period of time and minimal amount of real flubs. Like everybody messes up, including Warren Buffett, but he has had fewer really costly errors than anybody else really.

So is it fair to say that the secret of his success basically is he picked the right stocks and he held on to them for a long time? And if you're able to do that, which is enormously harder than it sounds, then you too would be Warren Buffett. Yeah. I mean, that's basically summed up roughly a thousand books on investing strategies quite quickly there. But yes, I mean, that's exactly what he basically embodies. He's been very critical of...

clever stock pickers, which is odd because he's a clever stock picker. So why has he been such a critic of people who at least superficially seem to be like him? He's always been very critical of his own profession. He sees most people in the investing world as kind of scamming a living. It's not that they aren't honest people or good people, maybe doing a valuable job, but he thinks that in reality, most of them do a very bad job

and they charge way too much money for doing so. And he's been pretty firm on that view ever since the 60s and 70s.

This leads to the story of a very big bet. You see, a particular target of Buffett's score were hedge fund managers. These are the modern masters of finance who, rather than the folksy "invest long term in strong companies" mantra of Buffett, use all kinds of financial wizardry to make huge amounts of money on the markets, often on very short term fluctuations.

By the 2000s, hedge fund managers such as George Soros and Ken Griffin had helped create a kind of mythical status around them, as if they were able to summon money from the markets at will. Basically, Buffett thought it was a myth, that a lot of these people actually do a mediocre job at best and charge tons of money for doing so. So he offered to bet...

a considerable sum of money against any group of hedge funds, against the entire US stock market. He thought the US stock market would beat any major group of hedge funds over a 10-year period. So just to be clear, he wasn't saying, I, Warren Buffett, can do better. He was saying the stock market as a whole, the S&P 500. Exactly. Exactly.

He wasn't pitching Butch Hathaway against hedge funds, no. He's literally pitching the cheapest, most boring, most plain vanilla thing you can imagine in the investing world against the highest octane, the most aggressive, the most brilliant, the best paid fund managers in the world.

In 2007, with the world's economy teetering on the edge of a big downturn, one hedge fund manager, Ted Seides, decided to take on Buffett's bet. To be precise, Seides was actually a manager of funds themselves investing in numerous hedge funds. Buffett and Seides each chipped into a fund that would 10 years later be worth a million dollars to go to the charity of the winner's choosing.

Buffett would win if the stock market outperformed the super smart hedge funds after fees over 10 years. Otherwise, Ted Seides would win. At the start, frankly, Ted Seides thought Warren Buffett had made a dumb bet. He just thought the stock market was going to go down a lot because of the looming financial crisis. And he was right. He nailed it. So for the first few years, it looked like Seides had played a blinder.

But over time, over the 10 years, the compounding effect of the stock market where you own everything, you own the bad stuff but you also own all the good stuff, it just did better and better and better. And frankly, in the end, Sides had to throw in the towel a year earlier just to concede that there was no way that he was going to win the bet.

So Warren Buffett is 94 years old. He was running Berkshire Hathaway for 55 years. He has stepped down, I think, understandably. Who is going to be the next Warren Buffett? Or is that a false question? Will there never be another Warren Buffett? No, I don't think there will be for a host of reasons. There will be other famous investors that we laud, but I suspect nobody will have his track record yet.

both in size and just the longevity of it. I mean, it is astonishing. I understand, at least this is according to Berkshire Hathaway's calculations, that if you had invested $1 in the S&P 500 index when Warren Buffett began 55 years ago, that $1 would now be $390, which is impressive.

But if you had put the same $1 into Berkshire Hathaway Buffett's fund, it would now be worth $55,000. It's staggering. Thanks to Robin Wigglesworth from the Financial Times. That's all we have time for this week. But if you want to get in touch, please send us an email to moreorless at bbc.co.uk. We will be back next week. And until then, goodbye.