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

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

#41

Post by MarkMc »

lutusp wrote: post #37
MarkMc wrote: post #30

Earlier quoted context omitted.

This comment deserves more votes. Buffett's argument in favour of skill is very persuasive, not to mention genuinely funny. Here's an extract: -------------------------------------- I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin…

> Buffet's argument in favour of skill is very persuasive, not to mention genuinely funny. Thanks for posting this -- it's first-rate. The fact that it corresponds exactly to my personal views can't be a factor, of course. :)

Well, the excerpt corresponds to your view, but not the full article. I'd be curious to know what you make of the arguments Buffett presents against this view.

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

#42

Post by beambot »

lutusp wrote: post #27
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.

> 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages. Oh, the managers will do worse than the market averages, because even if they avoid dumb moves, they will charge you for the privilege of managing your portfolio. My original remark was meant to measure their performance before fees, as the WSJ Dartboard Contest did it (a contest in which the managers weren't able t…

Indeed, 50 may do worse than the market... but it's not because of a faulty appeal to "statistics."

haliax is pointing out that 100 fund managers may not be an unbiased sample. It's perfectly possible to find a biased sample of 100 individuals capable of beating the market (eg. a group of 100 insiders trading illegally).

EDIT: The "correct" thing to say is... "Based on evidence, fund managers do not outperform the market. Therefore, in a random sampling of 100 fund managers, we would expect 50 to underperform the market." This assumes (1) there is such evidence (likely?) and (2) that 100 is a sufficiently large sample to overcome the error bounds.

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

#43

Post by conanbatt »

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.

The market is NOT a bunch of fund managers. Its a representation of the state of assets being debt/credit or company shareholding.

The market does not do better because there are fund managers, it does better if the underlying assets increase in value. All the other fluctuations are based on expectancies of those assets and arbitration.

It is entirely possible for 100% of fund managers to do below the market average, as fund managers dont own 100% of the market. It is also likely they have a losing bet against a market, as active fund managers employ resources in their operations, by trading and actively managing a portfolio, usually in the form of fees, and potential downsides on extra taxation as well.

Tracking "the winners" is the most fallacious and common attempt at gauging how good a fund manager or a stock is doing. Bernie Madoff was one of the winners for decades. Past results give no expectation to the future, which is so misleading given that the most common tool to show the value of a stock is a chart of how it did before, as opposed to how the company is doing (which require reading the statement).

I suggest reading "The Intelligent Investor". It is by far the best book on this topic out there , and it has enough layman terms and concepts that are very easy to understand once you expose yourself to them.

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

#44

Post by lutusp »

klodolph wrote: post #36
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). If you're going to simplify things, take out the numbers because the numbers are wrong. For example, let's suppose that there are six companies you can invest in, and six managers who each invest in one company. One company grows 600%, and the other five declare…

> If you're going to simplify things, take out the numbers because the numbers are wrong.

The numbers are exactly right. The problem lies with your example in which businesses either grow without bound or go bankrupt. In the real world, and typically, half of investors do better, and half do worse, than the market average.

> The other thing that's wrong is that you use the term "statistics" where you mean "probability theory".

Since one forms the foundation of the other, that's a distinction without a difference, especially when conversing with people who think there are secrets of the winners. The ideas are very simple, and specifying which aspect of statistics gives the most detail is hardly worth specifying.

http://en.wikipedia.org/wiki/Probability_theory

Quote: "As a mathematical foundation for statistics, probability theory is essential to many human activities that involve quantitative analysis of large sets of data."

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

#45

Post by robotcookies »

The title is incorrect because Buffett doesn't say playing the market is futile. In fact, he clearly states he believes a few will outperform due to skill (but that you can't distinguish which outperformers did so on skill versus luck).

What he does say in the quoted part is that a large fund of say 20 billion likely can't outperform due to it's size. That is a big difference from saying that it's futile to play the market (since not everyone is trying to invest 20 billion). It's also similar to what other investors like Peter Lynch believed.. that smaller investors have an advantage over the large funds.

This isn't made clear at all in the linked page. As far as I know, Buffett has always felt efficient market theory is wrong and that a few could beat the market on skill. There's also nothing in the linked quote that contradicts this (just the title that suggests it).

So the title is clearly deceptive. It suggests that Buffett did not believe in investing skill at a younger age and only changed his stated beliefs after becoming a very successful investor.

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

#46

Post by lutusp »

MarkMc wrote: post #41
lutusp wrote: post #37

Earlier quoted context omitted.

> Buffet's argument in favour of skill is very persuasive, not to mention genuinely funny. Thanks for posting this -- it's first-rate. The fact that it corresponds exactly to my personal views can't be a factor, of course. :)

Well, the excerpt corresponds to your view, but not the full article. I'd be curious to know what you make of the arguments Buffett presents against this view.

> I'd be curious to know what you make of the arguments Buffett presents against this view.

I read the entire article, and the problem is that it cannot distinguish between an effect and chance, and many have an incentive to call chance an effect. Also there's the announcement effect to consider -- once a player has a track record, people start reacting to his moves by buying the same stocks, after which the track record is no longer meaningful data.

The WSJ Dartboard Contest was a terrific test that could have shown a real effect, if there is one, and anyone who produced reliable returns would get a lot of free publicity. So there was a big incentive, but no one could show an effect. It was the closest thing to science I've seen, and it supported the null hypothesis.

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

#47

Post by MarkMc »

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…

Not quite - I think his point was that money managers with very large sums to invest cannot beat the market. He made that claim almost 40 years ago, and more recently his own record clearly contradicts it. So perhaps he no longer holds such a view...

Edit: It looks like Buffett had changed his view by 1984 [1]: "Size is the anchor of performance. There is no question about it. It doesn't mean you can't do better than average when you get larger, but the margin shrinks."

[1] http://www.tilsonfunds.com/superinvestors.html

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

#48

Post by marvin »

MarkMc wrote: post #30
ploomans wrote: post #7

Earlier quoted context omitted.

Warren Buffett once wrote an article about the points you are making: http://www.tilsonfunds.com/superinvestors.pdf . Interesting read

This comment deserves more votes. Buffett's argument in favour of skill is very persuasive, not to mention genuinely funny. Here's an extract: -------------------------------------- I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin…

Thanks. I am commenting on this just so I can refer to the full text whenever someone claims that Warren Buffett believes in the Efficient Market Hypothesis (something which appears to be the case from this extract, and which numerous commenters on this story seem to vehemently argue ;) )

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

#49

Post by nickff »

There is no evidence that mutual funds (or any other active managers) can outperform the stock market.[1] This can be explained by the strong form of the efficient markets hypothesis; "In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns." [2]

[1] http://faculty.chicagobooth.edu/john.Cochrane/teaching/35150...

[2] http://en.wikipedia.org/wiki/Efficient-market_hypothesis#Str...

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

#50

Post by bhickey »

lutusp wrote: post #39
im3w1l wrote: post #38

Earlier quoted context omitted.

>But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it. Not if it's costly. By that I mean what if there is a market oracle that can pick tomorrows winners, but you have to pay X dollars to pull the crank and get the info. In that case, it could be possible to "beat the market" in the sense tha…

I can't believe you aren't getting this. There are no secrets of the winners. > Real world example: http://www.cnbc.com/id/100809395 That's an announcement effect, not a method for beating the market. It exploits people's stupidity, not their intelligence. For a classic announcement effect, there are an equal number of winners and losers, and the average return is zero. In this specific example, some people get to bu…

You're on the money in both this post and the grandparent. However, I'd urge you to examine your style. There's no need to condescend. In particular: > I just proved it. If you didn't understand the above proof, read it again.

> I can't believe you aren't getting this.

Plenty of otherwise rationally minded people have a hard time reasoning about this stuff. If I had a dollar for every time someone suggested that you can beat the house by playing a Martingale... gosh! You'll have a much easier time persuading people if you don't insult them.

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