September 7, 2018
Reporting Efficiency: The Story of Warren Buffett’s Million-dollar Bet
By Jon Ogden | Senior Manager, Content Marketing at Workfront
Ten years ago, legendary investor Warren Buffett placed a million-dollar bet.
He bet a team of hedge fund managers that he could get higher returns than they could over the course of a decade.
Warren Buffett had to put his money in an index fund and leave it there, while the hedge fund managers could move their money around however their instincts and cutting-edge calculations saw fit. In other words, as the hedge fund managers spent hundreds if not thousands of hours over the course of ten years actively managing their money, Buffett would spend zero hours actively managing his.
Given that catch, it may be surprising that at the end of 2017, Warren Buffett won the bet — by a lot. Buffett’s choice averaged a 7.1% compounded average return, vs. 2.2% for the hedge funds. (At a glance, that might not seem like an enormous difference, but think of it this way. If you put $10,000 into a retirement account and left it there for 40 years, you’d end up with $131,565 more if your return rate averaged 7.1% instead of 2.2%.)
I’ll let other people explain why Buffett’s bet was smart and why he says that 99% of investors should not actively try to beat the market and should instead invest in low-cost, passively managed index funds.
What I want to emphasize here is how much time and talent the hedge fund managers put into getting worse results.
Buffett sets the scene this way: “During the ten-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would prove advantageous. In the process of investing, they studied 10-Ks, interviewed managements, read trade journals and conferred with Wall Street analysts. ... This assemblage was an elite crew, loaded with brains, adrenaline and confidence.”
So what’s going on? How did the work of more than 200 people lead to fewer returns year after year?
One reason is that work in the digital age has grown complicated and opaque — to the point that it’s easier than ever to hide inefficiency. Unlike the past, where the bulk of human labor came with self-evident results in the form of food, shelter, and clothes, the fruits of our labor at desk jobs today can get buried in a convoluted digital landscape.
When it comes to the world of investing, for instance, many fund managers continually trade stocks to try to outsmart incredibly complex markets and take a fee for each trade. As Warren Buffett explains (and as the evidence bears out), your broker is “like a doctor who gets paid on how often he gets you to change pills. If he gives you one pill and it cures you the rest of your life, he’s got one sale and one transaction, that’s it. But if he can convince you that changing pills everyday is the way to great health, it’ll be great for him but you’ll be out a lot of money and won’t be any healthier.”
Unfortunately, many clients of such managers often don’t have a clear sense that this inefficiency is happening because so many trading fees are hidden and because the returns can seem positive, especially when the market on the whole is doing well.
In short, a lack of transparent reporting in the digital age has led to widespread inefficiency.
This fact opens a set of crucial questions: If this inefficiency is happening at such a wide scale across Wall Street, how many other similar inefficiencies are happening in other industries?
And more to the point: How much inefficiency is happening where you work because of complexity and opacity? What inefficiencies are lurking just below the surface?
It can be hard to say. But if the opinions of knowledge workers are any indication, things don’t look as good as we might hope. According to data in our 2018 State of Work report (coming September 17th), the average knowledge worker believes that only 61% of their work matters to them personally — indicating that the other 39% (about 2-3 hours of work every day) is either inefficient, meaningless, or both. In a similar vein, we also found that only 40% of a knowledge worker’s day is spent on their primary duties, meaning that the other 60% is spent with secondary tasks such as excessive emails, wasteful meetings, unexpected phone calls, and so on.
All that inefficiency adds up. And just like financial investments, the problems of inefficiency compound year after year since what’s inefficient today paves the way for more inefficiency tomorrow.
In addition, a lack of transparency leads people to believe that work is inefficient, regardless of whether that’s true. According to our State of Work data, when U.S. workers are asked to rate the productivity of themselves, their co-workers, and their company leadership out of 10, they give themselves 8.2, their co-workers 7.2, and their company leadership 6.8. Chances are, this data directly tracks with the amount of transparency into each cohort. You likely know exactly how much work you’re doing, less about what your co-workers are doing, and even less about what your company leadership is doing. So a lack of transparency not only hurts efficiency. It also hurts perceptions of efficiency.
The key, quite simply, is better reporting and more transparency in your business. It’s all about having the ability to track the total work being done across your organization in conjunction with results. Without clear and automatic reporting in an operational system of record, you risk experiencing the same type of inefficiency that the hedge fund managers in Buffett’s bet faced — a whole lot of work for poor results. Such is the possibility of work in the digital age, with its layers of complexity and abstraction.
By bringing total transparency to all the work happening across your company, you’ll do what Warren Buffett did with his bet. You’ll shine a light on inefficiency and end up with far better results for far less work. What more could a business hope for?