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The 1975 Buffett memo that saved the Washington Post's pension

finance.fortune.cnn.com

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Re: The 1975 Buffett memo that saved the Washington Post's pension

#11

Post by valisystem »

mdkess wrote: post #4
lutusp wrote: post #2

A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…

What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and so hockey is just a game of chance. You have to fix your prior. Track performance for some period of time. Then track the winners. This will show whether it's a game of skill or chance.

You have to adjust your evaluation with the volume. If you're heading for the winning team, then alright, good intelligence on performance will be rewarded. But if you are three investors on the entire competition, it is very likely that skills advantage fades, since all your competitors have strong (if not mandatory) incentive to get top intelligence on the investment. In the end, your performance will be average, and your value earnings volumes will be your share of the entire market value creation for the invested period.

Re: The 1975 Buffett memo that saved the Washington Post's pension

#13

Post by fleitz »

lutusp wrote: post #2

A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…

The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative.

To put it succinctly: On average fund managers reduce ROI.

As an alternative measurement, if you take the funds managed by most managers and look at the portfolio 1 year ago the fund would be better off with the previous year's portfolio. (This time mostly because of transaction costs)

Re: The 1975 Buffett memo that saved the Washington Post's pension

#14

Post by maerF0x0 »

and yet he himself is an example of exactly the opposite mentality. He has been an outlier manager for decades and would have been a great choice of manager for anyone he would take money from. He effectively takes new money whenever his holdings pay dividends and reinvests it successfully. Roughly speaking he's returned 100% (vs 50% for the Sp500) in 10yrs giving about a 7.2% return rate. He consistently beats the market and then claims that "managers" cannot.

Re: The 1975 Buffett memo that saved the Washington Post's pension

#15

Post by rayiner »

haliax wrote: post #5
lutusp wrote: post #2

A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…

> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages.

Fund managers as a whole underperform market indexes.

Re: The 1975 Buffett memo that saved the Washington Post's pension

#17

Post by [deleted] »

lutusp wrote: post #2

A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and s…

[deleted]

Re: The 1975 Buffett memo that saved the Washington Post's pension

#18

Post by dylangs1030 »

rayiner wrote: post #15
haliax wrote: post #5

Earlier quoted context omitted.

> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages.

Fund managers as a whole underperform market indexes.

To expand on this point, Benjamin Graham gives an excellent layman's breakdown of why pursuing an index almost always prevails against trying to "beat the market" in The Intelligent Investor.

If you're looking to make money with the market, and you're not looking for a particularly high amount, and time is not an issue, an index fund is the way to go.

Re: The 1975 Buffett memo that saved the Washington Post's pension

#19

Post by redschell »

maerF0x0 wrote: post #14

and yet he himself is an example of exactly the opposite mentality. He has been an outlier manager for decades and would have been a great choice of manager for anyone he would take money from. He effectively takes new money whenever his holdings pay dividends and reinvests it successfully. Roughly speaking he's returned 100% (vs 50% for the Sp500) in 10yrs giving about a 7.2% return rate. He consistently beats the m…

Buffett is an interesting character. From this article, it would appear that he sees himself as some kind of entrepreneur/investor/manager hybrid than as a pure money manager.

http://dealbook.nytimes.com/2012/12/03/for-buffett-the-long-...

If you go on to read anything about activist investors, like Carl Icahn, you get the feeling that the only way to beat the market is to tamper with it.

Re: The 1975 Buffett memo that saved the Washington Post's pension

#20

Post by jmcgough »

This is why investing in an index fund is a great decision. When you rely on more active management, you pay higher fees, and your returns are likely to be about average (or worse). With an index fund you can take a healthy return, mitigate risk by diversifying well, and pay a fraction of the fee (which equates to hundreds of thousands of dollars over 30-40 years from the added growth).
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