Compounding Knowledge

Buffet is a smart investor and obviously he is successful, but I always wonder why articles like this don't realize there is a large component of survivorship-bias involved also.

I always like to think about this paragraph From "Fooled By Randomness" when I read this read articles on TechCrunch etc about how great and talented someone is (but it obviously easily maps to people like Buffet)

>Let’s push the argument further to make it more interesting. We create a cohort that is composed exclusively of incompetent managers. We will define an incompetent manager as someone who has a negative expected return, the equivalent of the odds being stacked against him. We instruct the Monte Carlo generator now to draw from an urn. The urn has 100 balls, 45 black and 55 red. By drawing with replacement, the ratio of red to black balls will remain the same. If we draw a black ball, the manager will earn $10,000. If we draw a red ball, he will lose $10,000. The manager is thus expected to earn $10,000 with 45% probability, and lose $10,000 with 55%. On average, the manager will lose $1,000 each round—but only on average. At the end of the first year, we still expect to have 4,500 managers turning a profit (45% of them), the second, 45% of that number, 2,025. The third, 911; the fourth, 410; the fifth, 184. Let us give the surviving managers names and dress them in business suits. True, they represent less than 2% of the original cohort. But they will get attention. Nobody will mention the other 98%.What can we conclude? The first counterintuitive point is that a population entirely composed of bad managers will produce a small amount of great track records. As a matter of fact, assuming the manager shows up unsolicited at your door, it will be practically impossible to figure out whether he is good or bad. The results would not markedly change even if the population were composed entirely of managers who are expected in the long run to lose money. Why? Because owing to volatility, some of them will make money. We can see here that volatility actually helps bad investment decisions. The second counterintuitive point is that the expectation of the maximum of track records, with which we are concerned, depends more on the size of the initial sample than on the individual odds per manager. In other words, the number of managers with great track records in a given market depends far more on the number of people who started in the investment business (in place of going to dental school), rather than on their ability to produce profits. It also depends on the volatility. Why do I use the notion of expectation of the maximum? Because I am not concerned at all with the average track record. I will get to see only the best of the managers, not all of the managers.

It's shocking to me how every thread about anki and spaced repetition is full of people questioning if remembering information has any value.

I greatly admire Warren Buffett. Sure, you wouldn't want to emulate a failed marriage or poor diet, but to me his positive qualities go beyond 'a lot of good'.

It's not his practice of reading income statements you may want to emulate - rather it's his focus and enjoyment of work.

It's his ability to ignore the naysayers and trust his own judgment - whether that be about the clothes he wears, the relationship he has with his wife, or the stocks he buys.

It's his approach of helping others - by explaining his investment decisions, supporting the Giving Pledge and of course by being so financially generous.

It's his approach to business - dealing honestly with employees, suppliers and shareholders, trusting others (eg. buying a billion dollar company on a handshake) and publicly admitting his investment mistakes. This contrasts particularly strongly with Donald Trump's approach to business.

It's worth noting that Fama has since then walked back on the strong statement of the Efficient Market Hypothesis. I don't know that he ever intended to say beating the market is impossible; rather that beating the market must be impossible, under the rigorously definition of an idealized, "efficient" market.

Unfortunately a lot of proponents of the EMH (especially non-academics) have taken this concept and run with it in ways Fama didn't intend. His position would be more accurately stated as the claim that modern markets are eventually informationally efficient, for any given instance of information asymmetry.

It's a useful model that approximates markets, not an empirical claim about the world.

Mr. President, is that you?