Author: Pu Fan, ChinaVenture

What Buffett opposes is replacing concrete investment judgments with agnosticism or even some kind of divine rhetoric.

“Buffett and VCs, one of them has to lose.”

A colleague relayed this statement to me. Recently, while traveling across the country for research, he found that many people mentioned this viewpoint, and the reasoning was largely the same:

On one hand, Buffett's Berkshire Hathaway has been a net seller of stocks for nearly three consecutive years. By May this year, its cash and equivalents holdings totaled a record high of $397 billion;

On the other hand, the U.S. capital market has witnessed an unprecedented “tech boom,” with the combined market capitalization of U.S. stocks related to information technology concepts approaching $30 trillion, accounting for 37% to 39% of the S&P 500 index—far exceeding the levels seen during the dot-com bubble—and this doesn't even include the various unlisted AI unicorns.

In contrast, isn't this just Buffett and VCs betting against each other on the future? The venerable Mr. Buffett is expressing his concerns through concrete actions, hinting that the tech industry has entered a standard “bubble state” and that early risk aversion is needed. Venture capitalists, meanwhile, are pouring the liquidity they've painstakingly recovered headlong into artificial intelligence, semiconductors, and computing centers, signaling to the outside world with unprecedented valuation growth rates and investment paces that “the bubble does not exist” and “value is vastly underestimated.”

Whichever possibility comes true means the other side is “completely out of the game.”

Following my colleague's relayed account, I conducted a thorough search. Let's start with the conclusion: Very few people are directly discussing this topic, and the antagonism is not that severe. Among all the information I retrieved, the harshest tone was probably from a Yahoo Finance column on May 21st, with a headline saying “Buffett issues his most dire warning yet,” which didn't mention VC or venture capital, focusing more on discussing Berkshire Hathaway's investment strategy.

But there are many people hinting frantically. For example, not long ago, the World Economic Forum released a research report titled “The Future of Venture Capital 2026: Unlocking Liquidity and Growth.” The report sharply pointed out: For a long time, venture capital has been a powerful engine for economic growth and technological progress, but the capital cycle underpinning its ecosystem is being broken.

This cycle refers to “funds investing in early-stage companies, successful companies exiting through IPOs or M&A, and then the distributed capital being reinvested into the next generation of startups”—yet today, venture-backed companies are staying private for much longer than in past decades. Globally, about 1,900 venture-backed unicorns (i.e., startups valued at $1 billion or more) remain private, representing a valuation of over $7.3 trillion, with an estimated $3 trillion in unrealized value sitting on the balance sheets of venture capital funds.

Around the time U.S. semiconductor concept stocks recently flash-crashed, a meme like this started circulating online:

What's more interesting is that, although Buffett hasn't publicly clashed with VCs in a war of words this time, he actually engaged in fierce debates with many investors during the historic financial storms of 2000 and 2008. This is also the theme of today's article. I want to use the topic “Buffett and VCs are bound for a showdown” to revisit the arguments Buffett had with the capital market back then.

“For capital, the internet brings negative impacts”

In December 1999, the renowned business magazine Barron's published a provocative column titled “What's Wrong, Warren?” At the very beginning of the article, the author laid out the piece's tone: Buffett was increasingly viewed by investors as overly conservative, even outdated. As Chairman and CEO of Berkshire Hathaway, Buffett might be the world's greatest investor, but he neither foresaw nor profited from the tech stock boom of the past few years.

Today, with the benefit of hindsight, it's easy to overturn this conclusion. At the very least, Berkshire Hathaway is still active in the capital markets, with a total market value exceeding $1 trillion, an undisputed “grandmaster” in the financial industry. Meanwhile, the star companies that created phenomenal growth during the dot-com bubble—like Pets.com, WebVan, Netscape—have long since ceased to exist.

But at the time, this article garnered considerable support. Because back then, the entire Nasdaq, driven by internet concept stocks, was in a state of unprecedented surge. Qualcomm's stock price rose over 2600%, twelve stocks saw gains exceeding 1000%, and another seven stocks rose over 900%. At the same time, the intense heat around the internet triggered severe FOMO in the market, attracting a large number of investors to switch positions. As a result, in 1999, the number of declining stocks on the Nasdaq actually outnumbered the advancing ones, with the overall index rising about 85%, while the S&P 500 index rose 19.5%.

Under this premise, although people recognized the existence of a bubble, it was generally believed that it wasn't yet a “critical moment.”

More importantly, the “What's Wrong, Warren?” article used a wealth of detailed cases to substantiate Buffett's “senility.” For example, the author mentioned that between 1998 and 1999, despite “maintaining a long-term friendship with Bill Gates,” Buffett made diametrically opposite investment choices, using large amounts of cash to acquire General Re, buy Dairy Queen, purchase the power company Mid-American Energy, and a furniture retailer. The author pointed out that these deals could only bring “stability” and couldn't make Wall Street “excited.”

Furthermore, the author mentioned a detail: he had sought a direct dialogue with Buffett, but Berkshire Hathaway declined the request. The original text stated “Buffett—a man who hides a fiercely competitive spirit beneath a humble, modest exterior—felt his pride was wounded.” Coupled with the fact that Berkshire Hathaway's stock price had fallen for the first time since 1990, marking the second-worst annual performance in the company's history since 1965, many people, after reading this article, became even more firm in their “faith,” which also became the “general纲领” for the capital market's opposition to Buffett for some time thereafter:

A financial titan from a bygone era, reputed to possess unparalleled investment experience and consistently known for stellar investment performance, showing signs of defeat in an almost狼狈 manner—what could better prove the correctness of the “internet economy” than this?

So how did Buffett counterattack?

The first direct confrontation occurred at the Sun Valley Conference in July 1999. Founded in 1983 and hosted by the U.S. investment bank Allen & Company, the Sun Valley Conference is held annually in July in Sun Valley, Idaho. Only absolute top-tier elites from various global fields can participate, such as Bill Gates, Bezos, Zuckerberg, etc. “Coincidentally,” a large number of highly influential business events often concluded shortly after the conference, making the Sun Valley Conference a frequent subject of “conspiracy theories,” akin to the “Freemasons” or “Illuminati.”

But I digress. In any case, for this edition of the Sun Valley Conference, the organizers appropriately invited a large number of internet nouveau riche. Yet Buffett, as the closing keynote speaker, chose to pour cold water on the proceedings, stating right from the start that “Stock markets can often deviate significantly from their true value for extended periods, but ultimately, value is the decisive factor,” and this essence means that “identifying a transformative technology and picking specific winning companies are two截然 different things.”

Buffett used the automobile and aviation industries as very specific examples. In the early 20th century, both inventions fundamentally changed human civilization, but nearly all of the hundreds of early automobile manufacturers and airlines went bankrupt. Based on this premise, Buffett stated that one of the biggest lessons from his investment career is that “the key to investing is not assessing how much an industry will impact society or its growth potential, but determining a specific company's competitive advantage, and more importantly, how long that advantage can last.”

Specifically addressing the capital frenzy emerging at the time, the venerable Mr. Buffett made a judgment: “I find it hard to find a compelling reason to prove that the stock market's performance over the next 17 years can come close to that of the past 17 years,” even bluntly stating, “Karl Marx did less damage to capitalists than the Wright brothers.”

This speech took place in July 1999. In November 1999, Fortune magazine obtained authorization and officially published it, causing a public uproar. It was actually this speech that led to Barron's “What's Wrong, Warren?” article and a large volume of similar criticism.

The second confrontation occurred in early 2000, a few months after the widespread ridicule. The beginning of this clash was slightly unexpected, as the old man admitted his “failure.” In an open letter published in March 2000, Buffett publicly acknowledged that “1999 was the worst year of my investment career,” and agreed that companies like General Re, Coca-Cola, and Gillette were somewhat outdated, noting that they “struggle to adapt to the changing global landscape.”

But in the same open letter, the old man also made no secret of his contempt for frenzied venture capitalists and tech stock investors, saying “If someone starts explaining to you what's happening in the truly crazy parts of this ‘magical’ market, you might recall a proverb: ‘A fool gives you reasons, a wise man never tries.’” and publicly announced the following predictions and decisions:

1. Berkshire Hathaway is confident in its investment portfolio, believing its yield over the next few years will outperform the S&P 500 index, and therefore the company will not initiate buybacks due to temporary stock price declines;

2. Berkshire Hathaway believes that the performance of the S&P 500 index in the coming years will definitely be far below its performance since 1982, and the current market prosperity cannot last, so they will not adjust their current investment decisions.

And the sentence I wrote in the subheading represents the third confrontation, which occurred at the Berkshire Hathaway shareholders' meeting in April 2000. When answering an investor's question, Buffett said: “If you analyze the internet, you'll find it's more likely to reduce corporate profitability than increase it. It will improve corporate efficiency, but many things can improve the efficiency of American businesses... So far, it (the internet) has boosted the monetary value of American businesses, but that just follows economic laws. And I think it's more likely to cause the overall value of American businesses to be lower than it otherwise would have been. ”

(Buffett and Munger in 2000, source: video screenshot)

Of course, strictly speaking, this shouldn't really be called a "clash" anymore. Because after the Nasdaq index peaked in March 2000, it had already begun a downward cycle. By the end of April 2000, the Nasdaq had already seen an exaggerated single-week drop of 25%, reaching the "moment of reckoning." However, a considerable number of investors believed that Buffett was not the real winner. For example, A16z co-founder Marc Andreessen argued that Buffett was merely "delaying" or "dodging" certain events, and that the "Internet bubble" itself was not wrong, just "bad timing."

He said: "The bursting of the Internet bubble made all ideas once considered genius instantly seem like utter madness and stupidity. Pets.com is a classic example. But in reality, all those ideas work today. I can't think of a single one that doesn't work now. "

"Most of the time, IQ cannot overcome risk"

If the 2000 debate was Buffett's hasty response amid market over-exuberance, then in the second debate a few years later, Buffett's role was more of the one "taking the initiative."

In May 2006, at the annual shareholders' meeting, Buffett put forward a viewpoint, arguing that over a sufficiently long time horizon, those so-called "professionals" engaged in "active management" would yield lower returns than "hands-off" business investors , because these professionals charge "excessively high" management fees, preventing investors from acquiring assets at low cost. To test his view, Buffett proposed a bet: if anyone could find 5 hedge funds with high fees, managed by well-known managers, whose returns could match those of a non-managed S&P 500 index fund, he would pay them $500,000.

Clearly, given Buffett's stature and his "prophet-like" performance during the Internet bubble period, no one dared to rashly question this view, let alone challenge it. So it wasn't until July 2007 that a challenger finally emerged: the hedge fund Protégé Partners LLC.

Let's briefly introduce Protégé Partners. Protégé Partners' founder is Jeffrey Glynn Tarrant, a standard veteran of the financial industry. He studied at Harvard Business School, and his first job after graduation—in 1985—was at Berkeley Asset Management, co-managing one of America's earliest hedge funds, the Sequoia Fund. Protégé Partners was Tarrant's second entrepreneurial venture (his first was the consulting firm Altvest, founded in 1996, later acquired by consulting giant Morningstar), initially a venture capital fund focused on early-stage projects, which later expanded into a hedge fund company.

The key point, of course, is that Protégé's track record was brilliant. By mid-2007, when the challenge was issued, their assets under management were $3.5 billion, with a return of 95%. Most notably, in 2004, they astutely detected that "the value of the real estate market and subprime mortgages was severely overvalued and about to plummet," and thus entrusted $60 million to legendary hedge fund manager John Paulson, who was firmly bearish on the US real estate industry, ultimately making a fortune in 2008. Their story was even written into a non-fiction business book titled *The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History*.

In short, Protégé fully met Buffett's criteria: well-known enough, capable of charging higher management fees, and a hedge fund. The specific bet was that Protégé, represented by co-founder Ted Seides, would bet on the performance of five hedge funds, specifically their average returns after deducting all fees, costs, and expenses. As a benchmark, Buffett chose the performance of a low-cost S&P 500 index fund launched by Vanguard (this fund's management fee is only 0.04%). The bet would start on January 1, 2008, and last for 10 years, concluding on December 31, 2017.

(Ted Seides, source: personal social media)

Let's state the conclusion first: Buffett won again, and even ended the contest early. Over the 9 years from 2008 to 2016, all five hedge funds selected by Ted Seides underperformed the index fund chosen by Buffett, with three of the funds having annualized returns of less than 1%.

In his article announcing "defeat," Seides had to admit Buffett was right, stating, "He was right, hedge fund fees are indeed very high, and his argument was very persuasive. Fees are crucial in investing, there's no doubt about that." Buffett also showed enough grace after the bet concluded, saying that both Seides and the managers of the five funds were actually "honest and intelligent people." But he also added, "The 2% management fee and 20% profit-sharing structure commonly used by hedge funds means that fund managers often receive generous compensation despite mostly providing obscure nonsense."

But the whole process wasn't as smooth as the outcome suggests. As is well known, the 2008 subprime mortgage crisis triggered a global financial storm, an environment that greatly highlights the value of "hedge funds," namely "risk resistance." Looking at specific performance, the index fund Buffett chose lost 37.0% of its value, while the hedge funds lost 23.9%. It wasn't until 4 years later that the index fund's returns overtook them.

During this period, Buffett's own investment business also suffered a Waterloo. At the 2009 shareholders' meeting, Buffett publicly announced that his personal assets had suffered an unprecedented loss of $3 billion in 2008. Berkshire Hathaway's losses exceeded $8 billion, with profits down 62%, marking the worst year since he took over the company. Buffett's self-criticism in his shareholder letter was profound, saying, "In 2008, I did some foolish things," believing everyone was experiencing an "economic Pearl Harbor," and pessimistically predicting the recession would be "long and deep." In 2015, the positive returns of the hedge funds chosen by Seides briefly surpassed the index fund again.

Most ironically, the best-performing asset in the entire bet was neither the fund chosen by Buffett nor the funds chosen by Seides, but the Treasury bonds purchased with the wager. In 2008, both parties bought $640,000 worth of ten-year Treasury bonds, expecting them to grow to $1 million at maturity, exactly fulfilling the initial $500,000 each commitment. As a result, under the influence of the subprime crisis and the global low-interest-rate rescue efforts, these bonds surged in value. By 2012, the account had already reached $1 million, and by 2017, the book value had reached $1.8 million.

So, similar to the debate during the Internet bubble era, the hedge funds were destined to fail after 2015, but they were unconvinced. Seides said: "The goal of hedge funds is not to beat the market, but to strive for positive returns over the long term regardless of market conditions. Their mindset is vastly different from traditional 'relative return' investors, whose main goal is to beat the market, even if that means losing less than the market average during downturns."

Economist Noel Watson believed that although Buffett won the bet, the entire victory seemed more like "celebrating a funeral as a wedding," because it seemed to indicate that capital markets had become highly homogenized. One of the most intuitive reasons is that the five hedge funds chosen by Seides were very diversified, with stocks being only a small part. Bonds, commodities, derivatives, currencies, and real estate were all included. Seides also pointed out in another article that Buffett's victory was merely a lucky encounter with the "post-economic crisis recovery period," and that the S&P 500's status as one of the best-performing indices globally actually benefited from "market exposure" returns.

From an investment logic perspective, Seides argued that "hedge funds—especially the fund-of-funds type chosen in the bet—are more geographically dispersed, biased towards small-cap stocks, and bear much less market risk compared to a fully invested, long-only portfolio."

In response, Buffett directly corrected his target in his 2016 shareholder letter and delivered unreserved mockery: "Many very smart people aspire to achieve above-average returns in the securities market. We call them active investors. Their opposites, passive investors, by definition, can only achieve average returns... But to a large extent, their efforts are mutually offsetting, and their high IQs cannot compensate for the costs they impose on investors. In the long run, on average, investors achieve higher returns by investing in low-cost index funds than by investing in fund portfolios. "

"Mr. Market should serve you, not guide you"

So, in summary, what Buffett truly opposes is not the Internet, nor hedge funds, nor all active management. He opposes two more fundamental things:

First, replacing concrete investment judgments with agnosticism or even some kind of divine rhetoric;

Second, artificially adding too many variables and thresholds to investment decisions, with the ultimate goal merely being "process monetization."

These two points can probably be applied to the current VC and AI narratives. VC certainly has its own difficulties; early-stage investing is inherently about placing bets when information is incomplete. If every company already had profits, moats, and certainty, VC would no longer be VC. The World Economic Forum report mentioned at the beginning also acknowledges that venture capital remains an important engine of technological progress. One of the most intuitive data examples is that, in the United States, companies that once received VC funding and eventually went public account for 94% of the R&D spending of public companies founded in the last 50 years.

But the report contains another set of changes more relevant to today: AI is changing the economics of venture capital. On one hand, AI-native companies can achieve revenue scales previously unimaginable with much smaller teams; on the other hand, the computing power, data centers, and energy systems they rely on require industrial-grade capital investment. In 2025, AI already accounts for more than half of global VC deal value, and an increasing amount of capital is concentrated in large financing rounds of over $100 million.

This is probably where Buffett would be interested. He might not deny that AI represents the future. But he would most likely continue to ask: How does this company ultimately make money? Will the profits stay with the model companies, or flow to chip makers, cloud providers, electricity, and data centers? Are today's valuations supported by cash flow, or by the next round of financing? If an industry requires increasingly massive capital expenditures as it moves forward, are investors buying technological dividends, or capital consumption?

So if, as during the previous two financial storm periods, a debate were to erupt again between Buffett and the capital markets, I believe the old man's target would certainly not be VC. He would just remind investors whether they are once again using "this time is different" to skip over price, using "the future is too big" to skip over business models, and using complex structures and private market valuations to obscure the simplest questions.

Finally, I want to conclude with a parable Buffett told at the 1987 shareholders' meeting: "You should think of market quotations as coming from a particularly eager fellow—Mr. Market, your partner in a private business. Mr. Market appears daily without fail, quoting a price at which he will either buy your shares or sell you his.

Although the business you both own may have stable economic characteristics, Mr. Market's quotations are anything but. For, sadly, this poor fellow suffers from an incurable emotional illness. At times he feels euphoric and can only see the favorable factors affecting the business. In that mood, he will quote very high buy-sell prices because he fears you will snap up his shares and rob him of imminent gains. At other times, he falls into depression and can see nothing but the difficulties facing the business and the world. On these occasions, he will quote very low prices, as he is terrified you will unload your shares onto him.

So treat Mr. Market like Cinderella at the ball, you must heed one warning or everything will turn back into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook that is useful, not his wisdom. If he shows up one day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you cannot be certain that you understand and can value your business better than Mr. Market, you shouldn't be playing this game."

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