In 02008, Warren Buffet placed a Long Bet that will take until 02017 to resolve. He predicted that for those ten years, “the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

Below is a summary of how things went in the fourth year of this Bet, as published by Fortune Magazine:

Four years into a 10-year wager that the S&P 500 index will return more than a selection of hedge funds, Warren Buffett has almost caught up with his competition.
By Carol Loomis, senior editor-at-large

FORTUNE — Results are in for 2011, the fourth year of the 10-year wager that is sometimes called, rather loosely, The Million-Dollar Buffett Bet. In this competition about investment performance, Warren Buffett is contending that an S&P 500 index fund will outscore the average return of five hedge funds of funds picked by his betting opponent, New York asset management firm Protégé Partners.

The standings now — which we will reveal in a minute — inevitably bring to mind Buffett’s reaction after the bet’s first year, 2008.

Both sides were clobbered in that market year from hell. But Protégé’s fund-of-funds picks (whose names, by the terms of the bet, have never been publicly disclosed) were down, on the average, by “only” 23.9%. Vanguard’s Admiral shares, which are Buffett’s entry in the bet, lost a dismal 37%.
From this way-behind position, Buffett was quoted in Fortune as saying, “I just hope that Aesop was right when he envisioned the tortoise overtaking the hare.”

And that’s close to what has since happened. Buffett’s index-fund tortoise won the second and third years and — you are reading it here first — also prevailed in the fourth. Not that the 2011 winner was much of a star: Admiral shares were up only 2.08%. But the five funds of funds, on the average, were down 1.86%.

All of which leaves tortoise and hare gasping alongside each other at the end of four years — and having absolutely nothing to cheer about. Protégé is still a bit ahead. But its funds of funds, on the average, are in the minus column for the period by 5.89%. Admiral shares are down 6.27%.

If we really mix metaphors and think about this contest as a baseball game, what we have here is a 0-to-0 tie after four innings, with each side doing nothing but striking out and alienating every fan watching.

The wager, however, has produced one sterling investment over the four years — and that was made, without brilliance aforethought, by Buffett and Protégé themselves. A little background: The idea was to set terms that would deliver $1 million to a charity chosen by the winner. If Buffett triumphs, the money goes to Girls Inc. of Omaha; if it’s Protégé on top, the beneficiary is Absolute Returns for Kids.

To ensure that $1 million would be there at the end of the bet, Buffett and Protégé each put up roughly $320,000 to buy a zero-coupon Treasury security. The total of about $640,000 was used to purchase a bond that will be worth $1 million at the bet’s conclusion. This collateral is being overseen by the Long Now Foundation of San Francisco, which administers “long bets” set up by any competitors wanting to memorialize a gamble.

In a period of declining interest rates, which we certainly have had, what happens to a zero-coupon bond is that its market price races toward the maturity value — $1 million in this case. Recently, the value of the Buffett-Protégé bond was about $930,000, which means that in just over four years it is up 45% from the purchase price. That doesn’t match the payoff from Apple (AAPL), but it’s a heck of a run during a time when the general stock market was a dog.

Both Buffett and Ted Seides, the Protégé partner who engineered the 10-year-bet, are well aware that the returns to be earned by the zero-coupon bond from its price today can be no better than meager for the nearly six years left in the bet. That’s because the ceiling is the bond’s maturity value of $1 million. The view is definitely unappealing, says Seides: “We’re looking at annual returns that won’t be much better than 1%.”

So the two sides began a few weeks ago to talk to the Long Now Foundation about its selling the zero-coupon bond and putting the proceeds into an investment that putatively could deliver the winning charity more than $1 million when the bet winds up. The first plan discussed was for half of the proceeds to be invested in Buffett’s company, Berkshire Hathaway (BRKA), and the other half to be invested in a fund of funds that Protégé runs (and that has always been assumed to be one of the five funds of funds that Protégé picked for the bet). But that plan died because it would have required Long Now to become a partner in the fund and, for complex reasons arising from the securities laws, it did not meet the definition of a “qualified purchaser.”
So a second plan was devised and is now going forward. It calls for the bond to be sold and the total proceeds to be invested in Berkshire Hathaway stock.

Naturally, some set of dire circumstances could make the roughly $930,000 put into Berkshire worth less than $1 million at the bet’s conclusion on December 31, 2017. So Buffett has guaranteed $1 million by giving Long Now the right at the bet’s conclusion to “put” the stock to him (or his estate) in exchange for that amount. In other words, $1 million becomes the floor for the winning charity, with the Berkshire investment establishing the prospect for more.
Meanwhile, the tortoise and the hare are dealing with the good market of 2012, which so far is suggesting that one or both might show — how radical! — a cumulative profit when the halfway mark in the bet is reached at the end of this year.

FORTUNE senior editor-at-large Carol Loomis, who wrote this article, is a longtime friend of Warren Buffett’s, a Berkshire Hathaway shareholder, and editor of his annual letter to shareholders.

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The news coverage around the above update of this bet has also revealed how the very fast news cycle can not only make mistakes, but actually report the exact opposite of what has occurred.

Note that the article above clearly explains that for the duration of the Bet, Buffet has been losing. Over the last three years he has been closing the gap created in the first year, but remains behind at present. Compare that fact to the coverage seen online yesterday as the update got picked up by various news outlets. Six of the ten stories listed below incorrectly lead the story by saying that Buffett is winning the bet:

UPDATE 3/26: Felix Salmon at Reuters traced the erroneous headlines back to a Bloomberg reporter who’s take on the story included updated figures based on extrapolated data.

Roger Pielke Jr. made an observation on his blog recently regarding the past decade’s rapid increase in commodity prices and the classic debate between optimistic Cornucopians and pessimistic Malthusians. In 01990 ecologist Paul Ehrlich – who has spoken at The Long Now Foundation’s SALT series – lost a decade-long bet to economist Julian Simon. In 01980, Simon had predicted that prices (of just about everything) would continue to fall as the human population increased. They tracked the price of five metals over the course of the next ten years, and they all became less expensive.

Since the beginning of the millennium, however, prices have risen fairly steadily. In August of 02011, The Economist noted that current prices of the five metals chosen for the Ehrlich – Simon bet exceeded 01980 prices. Had the bet lasted for three decades, rather than one, Ehrlich would have won.

What Pielke points out, however, is that if we zoom out even further and look at The Economist’s records since 1845, the last decade’s spike in prices could be interpreted as one more blip in a long-term trend of Cornucopian price decreases. Or is the global economy showing the first signs of a long-in-coming collapse, as predicted by Malthusians?

Long-term bets such as the $1,000 wager between Simon and Ehrlich can place people’s predictions about the future out in the open for public scrutiny and comment – encouraging those who would speak to think carefully before they do so. One project of The Long Now Foundation, Long Bets, provides a forum for long-term bets and discussion. On the site, you can view current bets, place your own, or challenge someone else’s prediction.

In his post earlier today, Bryan Campen mentioned Kevin Kelly’s 02019 Unthinkables – a set of predictions he made in 1999 that were specifically meant to be outlandish or – eponymously – unthinkable.

With 12 years of perspective on the predictions, Kelly concludes his post by saying that he doesn’t think any of them will come true.

As it turns out, however, one of them isn’t too far off the mark:

The fertility rate in China drops below the replacement level, and nothing the government can do can get Chinese couples to have more than 1.5 kids each. For the first time China encourages immigration to keep its huge economy going.

The first part of this prediction has happened. On China’s latest census, The Economist reports:

The data imply that the total fertility rate, which is the number of children a woman of child-bearing age can expect to have, on average, during her lifetime, may now be just 1.4, far below the “replacement rate” of 2.1, which eventually leads to the population stabilising.

The Chinese government, despite calls by many academic demographers, continues to stand firm on the one-child policy enacted in 1980.

Impact Lab points out that this demographic trend will lead to China’s workforce – the country’s primary economic advantage – beginning to shrink within 5 years. In order to mitigate potential economic problems from this change, the government is trying, “to develop technology- and innovation-driven industries that need fewer workers.”

If those industries don’t develop quickly enough, the government may have to look to immigration to supply the labor China’s economy needs and the second part of Kelly’s prediction won’t seem so unthinkable, either.

Warren Buffett and (l to r) Protégé Partners' Scott Bessent, Jeffrey Tarrant, and Ted Seides.

In 02008, Warren Buffet placed a Long Bet that will take until 02017 to resolve. He predicted that for those ten years, “the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.“

Below is a summary of how things went in the third year of this Bet, as published by Fortune Magazine:

Berkshire Hathaway’s chairman won the 2010 race for investment returns, but Protégé Partners retains the long-term lead.

By Carol Loomis, senior editor-at-large

FORTUNE — We’re three years into Warren Buffett’s 10-year bet with the hedge fund community, and the race has narrowed. For the second year in a row, Buffett’s horse in the contest — an S&P 500 index fund — did better than the average return booked by five funds of hedge funds picked by Protégé Partners LLC, a New York money-management firm.

The Protégé pack, though, built up a big lead in the first year of the bet, the financially torturous 2008, and is still ahead.

This contest, to look back briefly, began when Berkshire Hathaway (BRKA) chairman Buffett, no fan of the transaction and management fees that cut the returns of hedge fund investors, said publicly in 2006 that in a long-term bet he’d back an S&P index fund against hedge funds. Ted Seides, a Protégé partner, picked up the idea, and a bet was negotiated.

The Protégé camp may be out front, but that is not to say either side has done well: Neither is in the black for three years. In a sense, the only winners in this bet so far are the managers of the funds of funds, who’ve been paid fees even if their investors have lost money.

In the wicked start-off year, 2008, Vanguard’s Admiral shares — the index fund carrying Buffett’s colors — fell by a dismal 37%, and Protégé’s picks had an average loss of “only” 24%.

In the next year, 2009, the S&P index gained 26.6% to the funds’ 16%. And last year’s results — being announced here for the first time — showed the S&P rising by 15% vs. the funds gaining, on average, 8.5%.

The three-year record, therefore, puts the Protégé funds of funds in the lead with a loss of 4.2%, against the S&P’s even greater loss of 8.18%.

The year-by-year results display unsurprising patterns: Given the ability of hedge funds to sell short and invest in financial instruments other than stocks, they are the odds-on favorite in a bad year for the market — a 2008, for example — than the long-only S&P. Conversely, in a good year for the market, when many funds may continue to hedge with part of their assets, the S&P has the advantage.

Followers of this bet will remember that the names of the five funds of funds have never been disclosed — though Protégé itself runs funds of funds and the biggest of these, called Protégé Partners LP, may be assumed to be among the five.

Another reminder: The stake is $1 million — so to speak, because there’s a present-value factor built into the bet. At its start, each side put up $320,000, with the total going to buy a zero-coupon bond that will be worth $1 million when the 10-year competition is over. That money is to go to the charity that each side designated at the outset. (Buffett’s charity is Girls Inc. of Omaha; Protégé’s is Absolute Return for Kids).

The party holding the zero-coupon bond is the Long Now Foundation of San Francisco, whose wish to promote long-term thinking led it to set up a mechanism called Long Bets. On its site, www.longbets.org, you can read the predictions that various prognosticators have made about who will win the Buffett-Protégé contest.

There are no recent posts because Long Bets ran into a spam problem and for a time wouldn’t accept comments. It will take them now, though — so you’re invited to weigh in.

The writer of this article is a longtime friend of Warren Buffett’s and the editor of his chairman’s letter in the Berkshire annual report.

John Rennie over at IEEE Spectrum has an excellent article on Ray Kurzweil’s 108 predictions for 02009 from his book Age of Spiritual Machines.  Ray Kurzweil is an avid and fearless predictor who also logged the first of our Long Bets with Mitch Kapor.  I think it is great that people are taking the time to do an analysis of the predictions, and finding out how sticky it can sometimes be to adjudicate such things.

Kurzweil also stands by his claim that computer displays built into eyeglasses would project images into users’ eyes because some such systems do exist, and says, “The prediction did not say that all displays would be this way or that it would be the majority, or even common.” Similarly, he defends his claim that translation software would be “commonly used” to allow people speaking different languages to communicate by phone by pointing to smartphone apps that emerged at the end of 2009. He allows that one could quibble about how “common” their use is. [read the complete article]

Wherever you fall on these issues, I think Kurzweil deserves praise for making public predictions, along with those like Rennie and Annisimov who take any predictor to task.

I just happened upon a call for extras (check it out if you’re based in San Francisco) for a film that will be part of a series of sci-fi shorts called Futurestates:

What will become of America in five, 25, or even 50 years from today? FUTURESTATES is a series of 11 fictional mini-features exploring possible future scenarios through the lens of today’s global realities. Immerse yourself in the visions of these independent prognosticators as they project a future of their own imagining.

Nature reports quantum computing researchers achieve “success at entangling three-circuit systems”.

“The entanglement of two or more qubits sets up a ‘superposition’ of states in which calculations can run in parallel — in principle allowing a quantum computer to race through problems that it would take a classical computer eons to solve. Such a quantum machine would require hundreds or even thousands of entangled qubits. The maximum reached so far is 12, but some of the systems that researchers are working with, including those depending on the spins of ions, may be hard to scale up.” [read the story]

While this is progress it does not look like we are on the road to having a commercially available 100 qubit machine by the end of 02010 as predicted on Long Bets:

“There will be a quantum computer with over 100 qubits of processing capability sold either as a hardware system or whose use is made available as a commercial service by Dec 31, 2010”

Looks like this is a good prediction, but just a few years off.

From Craig et al., Can History teach us? A retrospective examination of long-term energy forecasts for the United States. Annu. Rev. Energy and Environment 27, 83(2002)

Stewart Brand sent in a piece by the Klimazweibel blog covered by Seekerblog.  It shows where the actual US energy consumption came in by 02000 vs the predictions from 01975.  It is interesting to see that we came in well below the lowest (read: most optimistic) prediction.  While the US still uses an amount of energy that would be unsustainable if adopted worldwide, it does look like all those energy efficiency programs that we started back in the seventies had a real impact…

Warren Buffett and (l to r) Protégé Partners' Scott Bessent, Jeffrey Tarrant, and Ted Seides.

The second year’s results on Buffett’s Million Dollar Long Bet are in.  Article from Fortune Magazine below:

By Carol J. Loomis, senior editor-at-large. April 27, 2010: 9:34 AM ET

(Fortune) — Unaudited results are in for the second year of “Buffett’s Big Bet” — Warren Buffett’s 2008 wager against Protégé Partners that a low-fee index fund will outperform certain funds of hedge funds — and the famous investor has gained some ground on his challenger. In the 2009 segment of the 10-year bet, an S&P 500 index fund — that’s Buffett’s pick — outdid the average performance of the five funds of funds that New York-based money management firm Protégé backs, 26.2% to 15.9%.

But Buffett’s spurt was not enough to undo the lead that Protégé’s funds had racked up in the turbulent year of 2008. True, the standings for the two years combined show both contenders having lost money. But Protégé’s picks are down 11.8%, less than the S & P’s minus 20.2%.

Both sides are measured net of all fees, costs, and expenses. By the terms of the bet, Protégé has never publicly disclosed the names of the five funds it picked. One of them is assumed to be the fund of funds that Protégé itself runs.

Buffett does know the names of the five funds and has seen their audited results for 2008. He will not see 2009 audited results for the funds until later this year.

The two sides, however, agreed last fall that “approximate” results for the previous year would be announced each spring, in time to be discussed by Buffett at the Berkshire Hathaway (BRKA, Fortune 500) annual meeting, which is to take place in Omaha this week, on Saturday, May 1st.

The precise index fund “bought” by Buffett is Vanguard’s S&P 500 Admiral fund
In a sense, the horses in this race have so far run true to form. In an up period for the market, which 2009 obviously was, the general market often beats hedge funds.

But in a bad year, and 2008 certainly fits that description, the short selling that many hedge funds engage in and their freedom to roam beyond stocks allows them to cut their losses and whip the S&P. In 2008, S&P’s Admiral shares were down a devastating 37.02%, The Protégé funds managed to fall by “only” 23.9%.

The money involved in this bet is $1 million — sort of. That qualification is necessary because of a present-value factor. Each side originally put up $320,000 as its wager. The total funds of about $640,000 were next used to buy a zero-coupon bond that will have appreciated to a value of $1 million at the end of 2017, when the bet concludes.

That prize will then go to the winner’s charity. If Protégé wins, it wishes the money to go to Absolute Return for Kids, an international philanthropy based in London. Buffett has designated Girls Inc. to get the money if he wins.

The party holding the money — that zero-coupon bond — is Long Now Foundation of San Francisco, which oversees a mechanism called Long Bets that will pay off the bet. Both Buffett and Protégé have posted arguments on Long Bets’ Website that explain why each thinks its bet will win.

–The writer of this article is a friend of Warren Buffett’s and the editor of his annual letter to Berkshire Hathaway’s shareholders.