In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. Mr. Buffett contended that, including expenses, a passive strategy invested the low-fee Vanguard S&P 500 index fund would outperform an actively managed portfolio of hedge funds over the 10 years ending Dec. 31, 2017. Protégé Partners LLC accepted, and the two parties placed a $1,000,000 bet.
Who is winning
By the end of 2015, Warren Buffet’s passive investment in Vanguard’s SP500 fund is up 65.7% compared to Protégé’s funds up only 21.9% and this is after Protégé got off to a better start in the 2008 bear market year. With two years left Protégé will have a difficult time making up the 44% difference. The passive philosophy is easily beating the active philosophy, but what is missing from the discussion is the third philosophy.
If Warren Buffet wanted some real competition, he should have included a seasonal strategy in the competition. Seasonal strategies use the same low-fee Vanguard SP500 index funds and only require two allocation adjustments per year. Our seasonal strategy applied to the SP500 is up 116% over the same period of time with only half of the market exposure, compared to Warren’s 65.7% passive strategy.
Returns improve if you earn interest in a low risk fund when out of equities, but I wanted to present the equity only data for comparison. If you apply a seasonal strategy to Vanguard’s small cap fund it performs even better. Why? Small cap stocks have a greater seasonal tendency
Seasonal strategies exploit a seasonal tendency observed for 300 years in the world’s oldest stock market and also observed for over 100 years with the Dow and in the 60-year history of the SP500 index. It has significant academic support and was used by Sy Harding’s award winning investment newsletter. The tendency is that equities on average perform better during the Winter and Spring, and tend to see their larger corrections and draw downs in the Summer and Fall.
If you take a look at the simple Sell-in-May strategy, you will find this strategy would have about a 1% lead over Warren’s buy & hold strategy by the end of 2015. That means the SP500’s average return for 6 months from May to November since 2007 was 0%. The small cap index Sell-in-May annualized return was 3% higher than the passive small cap index implying small caps lost 3% on average during the unfavorable season for stocks.
Enter Sy Harding
Why Sy Harding? Sy had a long track record of beating the indexes and his investment newsletter was professionally tracked. Mark Hulbert of Market Watch often mentioned him as one of the few market analysts who was able to beat the indexes by following an advanced version of what he called the Halloween Indicator.
Sy Harding provided timing for his Seasonal Timing Strategy for 16 years as part of his investment newsletter. He passed away recently, but we can still track his strategy. Sy Harding applied his timing signals to the Dow Jones Industrial Index, but for the bet I applied it to the SP500 index fund to obtain signals and returns.
Sy Harding’s Seasonal Timing Strategy is up 80.7% and that only includes the equity gains with only about 52% market exposure. Sy’s strategy is currently 15% ahead of Warren Buffet’s passive SP500 strategy and I am certain he will pull away further by the end of 2017 when the bear market fully expresses itself.
I was so impressed with the simplicity of Sy’s strategy I used it as the basis for developing a seasonal strategy optimized for the SP500 index and small cap indexes. Sy’s strategy was the only strategy that I found that improves your returns not by increasing risk, but by lowering your risk. Simply put, you are cutting your market exposure by half – the worst half.
A Seasonally-Modified Buy & Hold Strategy Wins
As mentioned above our own strategy applied to Vanguard’s SP500 strategy is up 116% through the end of 2015. We call our strategy a Seasonally-Modified Buy & Hold Strategy™ since an investor does buy and hold but only during the favorable half of the year for equities. Like Sy’s it only requires two allocation adjustments per year.
The strategy is more impressive when applied to small caps such as the Vanguard low-fee funds (VXF ETF) that tracks the Dow Jones Total US Stock Market Completion Index as the vehicle of choice. In plain English, the fund tracks all the US listed companies not in the SP500. For the bet, this small cap fund is up over 200% (237% for our TSP members switching to the interest bearing G fund).
If Protégé wants to have a chance to win the bet with Warren, we have the best investment philosophy and a strategy available for them. And it significantly outperforms in bear markets – so they better sign up soon.
TSP & Vanguard Smart Investor and our philosophy are the *antithesis* of the active hedge funds Warren Buffet railed against recently. Safe low-risk, low-fee investing where you get to enjoy your retirement funds instead of the active money manager. We want to help you do it.