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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

#61

Post by e12e »

MarkMc wrote: post #47
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…

Or, perhaps the stock market doesn't reflect value, and insider trading (in one form or another) is the norm, not the exception?

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

#62

Post by jrs235 »

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…

No. For 100 stock fund managers buying and selling stocks, statistics tell us that 50 of them will do better than the average of them (than the lower 50). To assume half will do better than the market is a failure of logic, assuming non stock fund managers are allowed to buy and sell too. Please qualify and clarify what you actually mean.

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

#63

Post by gfodor »

robotcookies wrote: post #45

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…

To paraphrase Buffett it's quite nice to have your "opponents" be taught the efficient market hypothesis is a fact, you can't beat the market, etc since its essentially stacking the deck even more in the favor of skilled individual investors.

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

#64

Post by huherto »

lutusp wrote: post #32
wheaties wrote: post #28

Earlier quoted context omitted.

There are managers who excel at investing money and unlocking value. Just because most managers in assets and investment vehicles afforded by those whose worth is not of a sufficient level does not mean they do not exist. People who can, do. They happen to charge 2 and 20 for the privilege of working your money.

> There are managers who excel at investing money and unlocking value. From a scientific standpoint, that is false. You need to realize that it's not possible to show (prove, demonstrate) that such stories arise from anything but chance. A certain number of people are going to do very well because of chance, and some of those people are going to try to pose as experts. But don't take my word for it -- instead, think…

I think the point of the article is that is difficult to distinguish between luck and skill. (Or even a combination) But skill is still involved. Not doubt some people are smart and knowledgeable and some are not.

Following your example I can imagine that there is a mechanism (I wouldn't call it surefire) that can improve your odds. But that mechanism is difficult to acquire, difficult to transfer and not very scaleable. Therefore it is difficult for everybody to practice it. In fact some do it so badly that they end up loosing more than the average.

> If you think hard enough, you will realize why there cannot be a deterministic, legal system to beat the market.

I don't think anyone is arguing that there is a deterministic legal system to beat the market. Only that some people may be skilled enough to beat the market. edit:punctuation

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

#65

Post by beambot »

Quoting from page 13:

A further problem is that in no case were the superior records (returns) I have observed based upon institutional skills which could be maintained despite changes in the faces. Rather, the good results have been accomplished by a single individual or, at most, a few, working in fairly specialized areas in which the great bulk of investment money simply had no interest.

So... he seems to predict a bleak future for Berkshire's returns after his departure as well?

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

#66

Post by lutusp »

jholman wrote: post #59
lutusp wrote: post #44

Earlier quoted context omitted.

> 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 "probabilit…

You're mistaken on both counts, even though your top-level point is essentially correct. On the first count, you're mistaken because there's no reason to assume that the distribution is symmetric. This doesn't damage your point , but as klodoph says, your actual example numbers are not necessarily representative. You'll note that this minor mistake in your comment has attracted a legion of minor corrections, all of t…

> On the first count, you're mistaken because there's no reason to assume that the distribution is symmetric.

First, I never said that, and second, that assumption isn't necessary -- the location of the mean won't change, and the mean is the thing you would need to beat, not the median. The reason is that market indices measure the mean (the sum of all the values divided by the count of values), not the median (the midpoint between the highest and lowest value).

> On the second count, that's like saying that math is the foundation of computing, and so the two are indistinguishable.

And? I invite you to argue that it's not so. Computers do what they do solely on mathematical and logical principles. Some would argue that that represents a drawback, hence experiments with things like fuzzy logic. But even fuzzy logic is deterministic and logical, it's just sometimes closer to messy reality. But all of computer science, and computer operations, are strictly logical.

> ... klodolph is correct that the two are different ...

Computer science and mathematics? Only someone unfamiliar with computer science would make that claim. Computer science is applied mathematics.

> ... so you should acknowledge the minor correction ...

Are you familiar with the idea that, if you make an argument, the burden is yours to produce evidence for it? Computer science is applied mathematics.

> Buffet suggests (and advocates) an alternative (his #5) that is NOT fully respectful of the efficient market hypothesis.

But that's not the topic. Whether the EMH is reflected in the real market or not, the issue is whether someone can consistently beat the market averages for reasons other than chance. These are separate, independent topics.

> Buffet claims that there may or may not exist investors who have superior (or inferior) skill, but that in MOST cases the results are due to luck, and "skilled" investors are mostly indistinguishable from lucky investors. Although I have not seen you agree or disagree with this claim ...

The reason I haven't either agreed or disagreed is because there's no way to establish it scientifically, with evidence. So I disagree that Buffett can make the case, and for the same reason, I can't make the case either. That leaves us with the null hypothesis -- without evidence, the thesis is assumed to be false.

> More generally, did you notice that your top-level comment was basically saying "Warren Buffet is wrong about this aspect of investing"?

If you invent quotes for people, we won't get anywhere. I can only say that Buffett can't make his case, and I have said that. That leaves us with the default scientific position -- the null hypothesis. Without evidence, an assumption that a thesis is false.

> ... some of the minor details of your points are technically wrong or confusing ...

Locate one, but be prepared to offer evidence.

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

#67

Post by hsitz »

robotcookies wrote: post #45

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…

I mostly agree. But "playing the market" as its normally understood involves trying to make money on the market within a fairly short time frame, by buying low and selling high. I believe Buffett has many times said that the market is a casino in the short run (playing the market) but becomes an accurate "weighing machine" over the long run (buying and holding for five, ten years or more). E.g., http://www.youtube.com/watch?v=-aYEOsZgRm8 So in that sense Buffett does think "playing the market" is a loser's game (that's played by "speculators", not "investors"), though I don't think that's specifically addressed in the linked letter.

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

#68

Post by lutusp »

beambot wrote: post #42
lutusp wrote: post #27

Earlier quoted context omitted.

> 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 ma…

> haliax is pointing out that 100 fund managers may not be an unbiased sample.

My point is that, of 100 typical managers, 50 will beat the averages. Not any specific set of 100 managers, just typical ones.

> ... and (2) that 100 is a sufficiently large sample to overcome the error bounds.

You're completely missing the point that it's not about any particular set of 100 managers -- they're just a representative sample meant to turn the results into convenient percentages.

A: "Take a random selection of 100 typical fund managers. Now ..."

B: "Wait! Which specific managers are you thinking of?"

A: "No, the 100 managers are meant to represent perfectly typical, average managers, and only to be able to use the number 100, in order to discuss the outcome in terms of percentages."

B: "Oh, umm, okay."

A: "How about I say 'Take a typical set of 1024 managers. Given that, 512 of them will beat the averages.'"

B: "Wait, where's my calculator? Is 512 half of 1024? Why are you trying to trip me up with oddball numbers?"

A: "Q.E.D."

> The "correct" thing to say is...

The correct thing to say is what I said.

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

#69

Post by lutusp »

huherto wrote: post #64
lutusp wrote: post #32

Earlier quoted context omitted.

> There are managers who excel at investing money and unlocking value. From a scientific standpoint, that is false. You need to realize that it's not possible to show (prove, demonstrate) that such stories arise from anything but chance. A certain number of people are going to do very well because of chance, and some of those people are going to try to pose as experts. But don't take my word for it -- instead, think…

I think the point of the article is that is difficult to distinguish between luck and skill. (Or even a combination) But skill is still involved. Not doubt some people are smart and knowledgeable and some are not. Following your example I can imagine that there is a mechanism (I wouldn't call it surefire) that can improve your odds. But that mechanism is difficult to acquire, difficult to transfer and not very scalea…

> I think the point of the article is that is difficult to distinguish between luck and skill.

Not difficult, impossible. It cannot be established scientifically. No control group, no meaningful controls.

> Following your example I can imagine that there is a mechanism (I wouldn't call it surefire) that can improve your odds.

And people who write worthless "secrets of the winners" books rely on this very assumption (and on the stupidity of the average investor). If such a thing existed, one of two things would happen:

1. It wouldn't remain secret for long, therefore everyone would practice it, therefore it would become the new average market performance. End result: no secret.

2. It would remain secret in perpetuity, the owner(s) of the secret would use it to either drain the market of its capital or foment public doubt about market fairness, as a result of which businesses would stop using the equities market to raise capital. End result: no market.

So the "secret" would either destroy the market, or the market would adjust to its existence in a way that everyone would have the same opportunity. Therefore there is no secret.

> I don't think anyone is arguing that there is a deterministic legal system to beat the market. Only that some people may be skilled enough to beat the market.

I hope you now see that this is impossible.

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

#70

Post by lutusp »

robotcookies wrote: post #60
lutusp wrote: post #32

Earlier quoted context omitted.

> There are managers who excel at investing money and unlocking value. From a scientific standpoint, that is false. You need to realize that it's not possible to show (prove, demonstrate) that such stories arise from anything but chance. A certain number of people are going to do very well because of chance, and some of those people are going to try to pose as experts. But don't take my word for it -- instead, think…

It doesn't have to be a 'system' that's replicable. It might just be on a case-by-case basis. Maybe a few people just have a knack at seeing something most others tend to miss and that this varies from stock to stock.

> It doesn't have to be a 'system' that's replicable. It might just be on a case-by-case basis.

Sure, no problem with that. Case by case -- half the time it works, the other half the time it doesn't. Sum the outcomes and you have average performance, and you might as well have invested in an index fund and caught up on your reading.

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