Chapter XXIV questions advice built only on present conditions and examines conflicts when brokers seek commissions while insiders want to sell. Livingston argues that prices anticipate future business conditions. His references to a particular forecasting horizon should not be treated as a universal market law.
A low multiple of current earnings can be misleading if those earnings are temporarily high or about to fall. Examine a range of future outcomes and the source of the recommendation. The book contributes questions about incentives and expectations; it does not supply a complete modern framework for diversified long-term investing.
Worked example
A hypothetical stock at $50 with earnings per share of $5 has a P/E of 10. If earnings fall to $2 with the price unchanged, that ratio becomes 25. A low trailing multiple was not a guarantee of cheap future earnings.
Case connection
Buffett’s wager adds a modern check on the investor’s retained return: fees matter alongside forecasts and reputations. It does not establish that a particular index price is attractive today or that its next decade will repeat the last.
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.
Further analysis
What exactly was being compared?
The wager compared an S&P 500 index fund with five funds-of-funds selected by Protégé Partners over 2008–2017. A fund-of-funds invests through underlying funds rather than holding only an ordinary basket of shares directly. Its structure can introduce more than one layer of expenses. The question was not whether an active manager could ever beat an index in a month or a year. It concerned the returns retained by investors across a specified decade and a specified set of alternatives.
The first year did not decide the wager
All five funds-of-funds outperformed the index fund during the difficult opening year of 2008. Someone selecting only that observation could have told a very different story from the final ten-year result. That is why the evaluation period is part of the hypothesis rather than a detail to choose later. Keeping the originally agreed horizon does not mean ignoring risk along the way, but it avoids announcing a winner by stopping the comparison at whichever date favours the preferred argument.
How to read the final table
Buffett’s 2017 letter reports a 125.8% cumulative gain for the index fund and lower reported gains for each of the five comparison funds. The chart reproduces those few reported numerical observations in an original drawing. They are cumulative gains, not annual returns. A 125.8% gain turns a normalised starting value of 100 into 225.8; it does not mean the investment earned 125.8% in each year. Fund D was liquidated in 2017, a qualification that belongs next to the data rather than hidden from the comparison.
Costs matter, but the comparison is not a universal law
The wager highlights the difference between the return an investment activity generates and the return its investors actually keep. Fees can compound into a substantial difference over time. However, these funds, this benchmark, and this decade do not represent every possible strategy or future market. A claim that all active management always fails would exceed the evidence. An investor still needs to consider an appropriate benchmark, the risks taken, the terms of access, and the full costs of the available options.
What belongs in a fair comparison?
Use a common starting period, comparable reporting conventions, and the returns available to the investor after the relevant charges. Avoid mixing a cumulative return with an annual percentage, a surviving fund with a disappearing one, or a gross marketing figure with a net benchmark figure. Differences in risk and mandate may also matter even when one final number is larger. The book connection is to independent judgment: an impressive professional story is something to examine, not a replacement for the comparison itself.
Common misconception
“The index fund gained 125.8%, so that was its annual return.” The figure covers the entire wager. Likewise, one winning historical comparison does not guarantee the same ranking in another period.
- 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.
Try it
Write an investment thesis with a base case, an adverse case, total costs, and a reason the recommendation’s source might be biased.