Curriculum·S211 Portfolio Analytics and Performance Measurement·about 40 min
Benchmarking honestly
By the end of this lesson you can
- →Explain why a benchmark chosen after the period is not a benchmark
- →Construct the do-nothing portfolio, which is the one benchmark requiring no judgment
- →Show how the same account produces opposite verdicts against different benchmarks
- →Account for the tax rate difference that activity creates against a held position
Sophomore · enrolled learners
This lesson opens with The Buffett and Protege Partners bet, 2008 to 2017.
- What happened
- Warren Buffett wagered that over the ten years from 1 January 2008 to 31 December 2017 an S&P 500 index fund would outperform a portfolio of funds of hedge funds, measured net of fees, costs and expenses. Ted Seides of Protege Partners accepted and selected five funds of funds. The terms were published in advance on the Long Bets site. Buffett reported the result in his 2017 shareholder letter: the index fund gained 125.8 percent over the decade, about 8.5 percent a year, while the five funds of funds gained 21.7, 42.3, 87.7, 2.8 and 27.0 percent respectively, averaging 36.3 percent, or about 3.1 percent a year. The stake of $2,222,278 went to Girls Incorporated of Omaha.
- The decision point
- The bet is not interesting because active management lost. It is interesting because of the one procedural detail that made the result mean anything: the benchmark, the horizon, the fee treatment and the adjudication were all fixed in writing before the first day. Nobody could revise the comparison afterwards, and that is the only condition under which a performance comparison carries information. Every benchmark chosen after a period is chosen with knowledge of the answer.
What you will be able to answer
- →What makes a benchmark meaningful?
- →What is the do-nothing portfolio?
- →Why does benchmark choice matter so much?
- →What is the real tax cost of activity against holding?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://longbets.org/362/
- https://www.spglobal.com/spdji/en/research-insights/spiva/
- https://www.institutionalinvestor.com/article/2ei0q73dr49zygyfxzu2o/portfolio/active-continue-to-struggle-especially-when-measured-over-long-time-periods
- https://www.dalbar.com/PressReleases/doc/QAIB2024_PR.pdf
Confidence high·Volatility low·Reviewed 2026-08-06·Owner unassigned
Contested
The tax figures in the worked example use illustrative United States rates for short-term and long-term treatment. Rates, holding period thresholds and whether a disposal is taxable at all vary by jurisdiction, per F108. The mechanism being taught is that activity changes the rate, and that mechanism is general even where the numbers are not.
A single ten-year bet between two parties is one observation and is presented as an illustration of procedure rather than as evidence about active management. The evidence for that claim is this course's autopsy, which is a scorecard covering twenty-two categories over fifteen years.