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

> The insult here--"groupie-purchases"--suggests you understand Buffett's existence is a serious blow to your case.

Nonsense. The announcement effect is a well-established distortion of the market:

http://www.investopedia.com/terms/a/announcment-effect.asp

> ... to your case.

My case? The fact that investment managers cannot produce results has been proven over and over again. It's not my case, it is a simple fact about reality. All you need to do is review the WSJ Dartboard Contest.

http://www.investorhome.com/darts.htm

In the Dartboard Contest, managers had every incentive to prove what they could do -- a success would have made them simultaneously rich and famous. They failed. Any questions?

> As you implicitly acknowledge with your hypothesis of the "announcement effect" ...

"My hypothesis?" You need to learn something about equities. The announcement effect is very well-known.

http://www.economicshelp.org/dictionary/a/announcement-effec...

Do you suppose I wrote all these articles, and talked a bunch of economists into believing in it? For God's sake.

> ... the null hypothesis is that Buffett beat the market.

The null hypothesis is that Buffett did not beat the market based on special skills. The null hypothesis is that Buffett's performance has a pedestrian explanation -- chance. That's what the null hypothesis means.

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

Quote: "In statistical inference of observed data of a scientific experiment, the null hypothesis refers to a general or default position: that there is no relationship between two measured phenomena, or that a potential medical treatment has no effect."

I can't repair the defects in your education in a series of forum posts -- you will just have to go out and get an education on your own, like a grown-up.

If what he says here is true, the parents of every kid on the planet should test their child for some aptitude in this area--at least a little--because learning your kid was preternaturally adept at, basically, "Making a Lot Of Money" would be the most important thing that ever happened to the kid. Also wouldn't it have been one of the most sensational "news events" of all time, if nothing else, when someone honestly reported Someone Has Found the One Weird Trick To Becoming Really Rich, And It Always Works If You Do It Right. The rise in billionaires I surely would have heard about, at least.

So what's the catch? Why can't I just go and study this book and make a lot money if I think I'm smart, now that I've read this article?

> You assume any such 'secret' is infinitely scaleable.

First, I never said or assumed that. Second, Human greed is, in fact, infinitely scaleable. But this is a silly debate -- obviously the most likely explanation for a spectacular market performance is chance.

> Insider trading is an advantage that exists but doesn't fall into your #1. Has it 'drained the market' or stopped businesses from using the stock market?

In a word, yes -- in a number of cases, companies try to buy themselves out of the stock market, for that and other reasons (like the tyranny of quarterly earnings reports and shortsighted boards of directors).

We're off on a tangent now. We've left the original topic. And the original topic was resolved by noting the WSJ Dartboard Contest, where managers had every incentive to show what they could accomplish, but instead they failed, spectacularly, in public, for years.

> So what's the catch?

The catch is that testing people for an unexplained adeptness at making money in equities is essentially certain to produce a handful of "successes" that arise from chance, not talent.

Given a pool of ten million investors, all playing the market, and all making random picks, it is certain that a handful will succeed spectacularly because of chance. I know because I have modeled this sort of thing with computer programs, each of which produce "winners" simply by making random picks.

With a large enough population, some will "succeed" spectacularly, through chance. Those successes will find it hard to accept that their success arose from chance rather than genius, just as happens in real life.

> Why can't I just go and study this book and make a lot money if I think I'm smart, now that I've read this article?

If there really was a book that contained secrets to beat the market, secrets that worked, that were reliable, that anyone could put into practice, businesses would abandon equities as a way to raise operating capital. After all, why should they line the pockets of a bunch of non-productive speculators? What possible incentive would they have?

The only reason the equities market works is because investors get a fair return on their investment, consistent with the risks they take, and businesses get operating capital at a reasonable rate as well. Both parties to the transaction get a fair deal. All this talk about making a killing in stocks using "secrets of the winners" overlooks the fact that, if it were possible, if someone could really make a fortune by something other than blind luck, reliably, deterministically, the market would collapse.

And for the life of me, I can't understand why people find this so hard to understand.

The title is misleading, but Warren Buffett is right.

The more money you manage, the harder it is to beat the market as a trader. However, if you're playing with a modest amount of money, you can play the market, since moving small amounts of money around is much easier than say, 20 billion...