Why Can't Active Funds Beat the Index Long-Term? The Buffett Bet and the SPIVA Verdict

Before we ask "are Taiwan's managers somehow better," we have to understand why, in America, even the smartest people lose to an index fund that does nothing at all.

2026.06.03 ｜ Shiba the Disciplined ｜ ProfitVision LAB ｜ Active vs. Passive Series: ① U.S. (this piece) → ② Taiwan → ③ The Marathon Fund → ④ Active ETFs

A Bet That Ran for Ten Years

In late 2007, Warren Buffett made a public wager: one million dollars that a low-cost S&P 500 index fund would, over the decade from 2008 to 2017, beat any basket of hedge funds a professional could hand-pick.

His challenger was Ted Seides of Protégé Partners. He didn't pick at random — he chose five "funds of hedge funds," together feeding into more than a hundred elite underlying hedge funds. In other words, he mobilized Wall Street's most expensive, most sophisticated talent. The prize would go entirely to the winner's chosen charity.

Ten years later, the result wasn't a contest. It was an execution:

The five hand-picked baskets returned, cumulatively over the decade, 21.7%, 42.3%, 87.7%, 2.8%, and 27.0% — not one caught the index's +125.8%, and one made just 2.8% in ten years, essentially standing still. The prize (grown to roughly $2.22 million after being placed in Berkshire stock) went to Girls Inc. of Omaha.

Buffett was never betting that markets would rise. He was betting that layers of clever people — charging management fees, performance fees, and trading constantly — would, after costs, fail to keep up with a fund that does nothing but quietly compound. He bet on human nature and on costs, not on luck.

Not an Anecdote, but the Whole Population: the SPIVA Verdict

A single bet could be luck. But what if you took "every active fund in America" as your population and gave it an annual checkup? That is exactly what S&P Dow Jones Indices does each year with its SPIVA Scorecard — it measures the percentage of active funds that lagged the index they were supposed to beat.

As of year-end 2024, the answer is uncomfortable. The headline first: the longer the horizon, the more managers lose.

Put differently: if in 2010 you had randomly picked a U.S. large-cap active fund and held it for 15 years, there was a nearly nine-in-ten chance you'd regret not just buying the index. Widen the lens to all U.S. domestic equity funds versus the broader S&P Composite 1500, and the 15-year lag rate climbs to 93.23%.

And a crueler fact: over the 15-year period ending in 2024, there was not a single equity category in which a majority of active managers beat their benchmark. It wasn't large-caps losing while small-caps won — it was a clean sweep.

One nuance matters: SPIVA is not saying no active fund can ever win. It asks the harder question investors actually face: could you identify the future winner in advance, then hold it through the full cycle? Great active managers do exist. SPIVA's point is that, across the full population, the ex-ante odds of picking one are much lower than fund marketing suggests.

Why? The Three Structural Reasons Passive Wins Long-Term

Active funds aren't "not trying." The problem is that the math of this game is stacked against them from the start. Three reasons — and they compound:

Reason 1: The market is too efficient (clever people cancel each other out)

U.S. equities are the most thoroughly analyzed market on earth. Every earnings report, every supply-chain rumor is priced in within seconds by thousands of analysts. When everyone is smart, the winners' excess return must equal the losers' shortfall — it's a zero-sum game. Nobel laureate William Sharpe long ago made this point with "The Arithmetic of Active Management": before costs, the average active investor can only equal the market; they cannot collectively beat themselves.

Reason 2: Costs turn zero-sum into negative-sum

Once you add management fees, trading costs, and taxes, that zero-sum game becomes a negative-sum game. Index funds can carry expense ratios as low as 0.03%–0.1%; active funds routinely charge 1%–2%. A 1.5% annual cost gap, compounded over 20 years, eats more than a third of your final wealth. That's why the lag rate rises with time — time is the amplifier of costs.

Reason 3: Index concentration (the winner-take-all problem)

A cap-weighted index has a hidden feature: it automatically places the biggest weights on the biggest winners. Over the past decade, U.S. returns were heavily concentrated in the "Magnificent Seven." A manager "diversifying for safety" who even slightly underweights these names will lag the index — and over-concentrating violates risk discipline. The cap-weighted index is itself a momentum bet you can hardly avoid losing to. Remember this idea — it becomes the heart of the entire series when we reach Taiwan.

So What Does the Other Side Say?

Honesty is the floor of research, so the counter-argument belongs on the table too. A 2026 academic paper argues SPIVA is "too pessimistic." Its critique has three points — counting every closed fund as a loser, equal-weighting regardless of size, and comparing against a "hypothetical index" rather than a "real, buyable passive fund." Switch to "asset-weighting" and the active lag rate falls from 79% to about 56%. That is exactly why this series does not only ask "did it win?" It asks, "against which benchmark?"

So What About Taiwan? Will Its Managers Be the Exception?

By now a reasonable objection should be forming in your mind: the U.S. market is too efficient, so there's no room for active. But Taiwan is different.

In Taiwan's stock market, retail investors have long accounted for 60–70% of trading volume. In theory, more retail means more emotional pricing, which means a "less efficient" market — and inefficiency is precisely the soil where active managers find bargains and earn excess returns (alpha). So a natural hypothesis follows: in a dumber market, smart managers should win more easily.

It sounds reasonable. Taiwan even has evergreen funds like "Capital Taiwan Marathon," marketed as a living billboard for "beating 0050 year after year."

So have Taiwan's active funds actually beaten the market? In Part 2, we answer with Taiwan's own data — and with a question that will make you rethink what "beating the market" even means. The answer may run completely against your intuition.

Frequently Asked Questions