The racing discussion compares racecourse deductions with the costs borne by market participants. It draws attention to the institutions that receive payment regardless of an individual participant’s success.
Use a net result
Our illustration treats costs as a separate line. Commission, spread and other execution costs can change the conclusion even when the directional observation is correct. The historical deductions discussed in the book are not a current fee schedule.
Worked example
A hypothetical method produces a $12 average gross gain per completed trade. If its combined execution costs are $15, the average net result is −$3.
Case connection
Compare what participants retain after fees. This wager is an illustration, not proof about every manager or every future decade.
Buffett’s ten-year fund wager
Source-grounded facts
Buffett’s 2017 letter reports that the S&P 500 index fund beat each of five funds-of-funds over the wager.
Context
Buffett and Protégé Partners compared an S&P 500 index fund with five funds-of-funds over ten years, from 2008 through 2017. The comparison included the returns investors retained after fees.
Outcome
One comparison fund was liquidated in 2017, a fact noted in the table. The wager illustrates costs and evaluation periods, not a universal result for every manager or decade.
- All five funds-of-funds outperformed the index fund in the difficult first year, 2008.
- The comparison continued through the agreed decade rather than stopping after that initial result.
- Buffett’s final table reported a 125.8% gain for the index fund; none of the five funds-of-funds matched it.
Case analysis
The comparison asks what an investor retains, not which product sounds more sophisticated. Separate gross performance, charges and the final net result. The selected decade cannot answer every future comparison, and manager skill is not isolated by this wager alone. It does show why leaving costs out changes the question an investor is actually trying to answer.
Try it
Take a paper result and add a separate cost estimate. Note which costs are known and which are assumptions.