The bet was simple. Buffett would invest in a Vanguard S&P 500 index fund, and the hedge fund could do anything they wanted.
http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/
http://www.npr.org/2016/03/10/469897691/armed-with-an-index-...
His biggest returns for the first 3/4 of his adult life involved him going against the market when equities were out of favor and scooping up extremely large positions in the likes of The Washington Post, GEICO, American Express, Wells Fargo and Coca Cola.
His extraordinary history of stock picking is what enabled him to begin buying entire substantial businesses in the first place. The stock picking is what accumulated the capital necessary to buy Blue Chip Stamps and See's Candies. The Buffett partnerships for example were not built around buying up entire businesses and operating them for decades to reinvest the cash flow, and yet his returns were dramatic - regularly stomping the Dow - during those years precisely because he was such a great stock picker.
The advantage he had in the GS preferred stock offering in 2008 was his ability to provide liquidity and his name - if GS told people that Warren was investing in them then it was a real vote of confidence.
When full ownership is taken (his preferred option), the original management is almost always left in place. No rules or guidance are given. The subsidiaries work however they worked before acquisition.
That said, after reading through his 50 Berkshire Hathaway letters, the main lesson I drew was: own insurance companies which underwrite for profit under all economic conditions.
The Bank of America deal shows how good a deal you can get when you can put $5B where your mouth is
> In exchange, Berkshire Hathaway received $5 billion worth of preferred stock yielding 6% a year plus warrants to purchase 700 million shares of Bank of America common stock at an exercise price of $7.14 per share.
apologies in advance for linking to fool.com http://www.fool.com/investing/general/2015/08/19/how-much-is...
It helped that they were structurally inclined to build up cash. As Buffet explains, a booming share market is bad for him: everything is too expensive to buy.
So cash piles up, waiting for good deals of sufficient magnitude to arise.
When a bust arrives, there are bargains everywhere and a lot of money to buy into them.
Buffett gets to do deals (on better terms no less) that others can't as a result of his celebrity and this has been the case for a long long time.
[1] In the same way Trump has but with a much better track record.
A good troll would have been to buy Berkshire Hathaway.
Ugh. Now we have npr teaches "law of averages" backwards
https://www.bloomberg.com/view/articles/2012-04-24/what-was-...
http://www.forbes.com/sites/randalllane/2012/03/26/warren-bu...
https://www.quora.com/What-was-the-fee-structure-of-Warren-B...
Won't the "tracking fee" of the index funds keep increasing, as a larger and larger fraction of the market is covered by them? Whenever a stock rises to X$, billions' worth of index funds will rush to buy the stock to rebalance their holdings, but clearly that should further raise the price of the stock (and they'll have to buy it at X+0.10, or X+0.50).
If a stock goes up, they don't need to buy more of it - the value of the shares they hold will increase to exactly the right proportion that they should have.
(There do exist other types of funds which try equally weight the stocks they hold, which means the fund has to rebalance when the stocks change price.)
Typically, cap-weighted funds only have to rebalance when individual members of the fund buy/sell - and they try to make it so people are buying/selling to those within the fund where possible to avoid having to do even that. The result is a very low churn, which is part of why index funds have lower fees.
Usually, the more assets an index fund has under management, the lower an index fund's fees get.
EDIT: and doesn't my above argument hold at the boundary? When a stock is brought into the S&P, suddenly all of the index funds need to stock up on it, further bolstering its price, no?
You're correct about what happens at the boundary, yes.
There's a well-known arbitrage opportunity for stocks that are known to be about to be brought into the S&P 500 (their prices DO tend to increase, I believe), if you want to research that. Like all publicly known arbitrages, I doubt you can make any money off it personally anymore though.
This is part of why the recommendation is not to use an S&P 500 fund, but something more like Vanguard's Total Stock Market fund, which includes medium/small-cap companies. Not that it's a huge deal, though - mutual fund companies are usually pretty clever about spreading large orders out over time.
So while it's still possible to raise capital by printing stock, this is happening less and less lately.
http://www.theatlantic.com/politics/archive/2015/02/kill-sto...
Setting Warren Buffett aside, what you neglect to mention is that the stock market is both a primary and secondary capital market. We can speculate about how to speculate... whether to be passive or active... but this concerns only the functionality of the secondary market. There's still primary market functionality: companies issue stock to raise capital, buyback stock, and issue dividends. Thus, even if all the investors are passive, there's still always one active agent in the game: the company itself. And a capitalization-weighted index is ideally suited for this activity: it automatically shifts capital away from companies buying back stock (essentially, companies returning money to investors) to those issuing new stock (essentially, companies seeking to raise capital).