The 1975 Buffett memo that saved the Washington Post's pension • Hacker News Board

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

#101

Post by jacques_chester » Sat, Aug 17, 2013, 8:20 AM UTC

marvin wrote: post #99

robotcookies wrote: post #88

Earlier quoted context omitted.

That's a good point. Many people who don't believe in the strong version do actually fall into the weak form.

But there is a very significant difference between the two. The strong form leads you to believe that it is impossible to expect to do better than the average even with a Herculean effort. The weak form allows that it is possible to beat the market, even by a lot, if you have insight or capabilities that most of the market lacks. This leads to wholely different conclusions. In (1), a cheap index fund is the only inve…

It's important to note that the EMH doesn't suppose that all actors agree on the price. It just means that the price represents the summed outlook of participants.

Those who think a stock is underpriced will bid it up to get more; those who think it is overpriced will sell out at progressively lowering prices.

Because the movement in prices creates an opportunity to profit for those who have information that is not yet revealed, those people will enter the market and create pressure on the price.

In some mathematical forms, this is assumed to happen instantaneously and universally. Thus: all available information is factored into the price. Essentially, you can't arbitrage because you have instantaneously driven up the price already by arbitraging. (It's weird, yay calculus).

The looser forms basically say that this is what happens in the long run, on the average, even without instantaneous adjustment of prices. And when you compare market time series to pure randomness, they have similar characteristics. So in a sufficiently large group of agents, some will profit and some will lose merely by chance. Then you're back to taking an average and being unable to beat it in the long run, because in a game of chance outcomes converge to the long-run probabilities of the game.

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

#102

Post by jacques_chester » Sat, Aug 17, 2013, 8:38 AM UTC

jacques_chester wrote: post #80

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…

> Buffett has always felt efficient market theory is wrong People often refute the EMH without understand that it is a family of hypotheses, from the Strong to the Weak form, with a great deal of subtlety in their concept and meaning. Buffet's argument in the linked excerpts is actually pretty close to a weak form of the EMH: all participants start with broadly similar information and capabilities, so performance nat…

I should correct myself, because I've made an incorrect statement of the facts. Strong to weak in Fama's major paper identifying strong, semi-strong and weak variants[1] refers to the distribution of knowledge available to participants. The strong form assumes some participants monopolise inside information; the weak form assumes that all participants start with identical information of historical stock prices. The semi-strong looks at changes based on changes in publicly available information -- like Icahn's tweet the other day.

However there are variations in the construction of the models of EMH. I guess you might generally divide them into calculus models, which resolve instantly, and agent models, which introduce time. For example, in the linked paper, there's a discussion first of the "frictionless" market and then a discussion of more realistic models which include transaction costs, different opinions of agents etc.

The general idea that a market can be efficient in the long run and bubbly in the short run isn't easily refuted. Not least because at any point in time there's just no way to know what future prices will be and so no yardstick by which we can say "this is rational" and "that is bonkers".

[1] http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%2...

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

#103

Post by marvin » Sat, Aug 17, 2013, 9:05 AM UTC

jacques_chester wrote: post #101

marvin wrote: post #99

Earlier quoted context omitted.

But there is a very significant difference between the two. The strong form leads you to believe that it is impossible to expect to do better than the average even with a Herculean effort. The weak form allows that it is possible to beat the market, even by a lot, if you have insight or capabilities that most of the market lacks. This leads to wholely different conclusions. In (1), a cheap index fund is the only inve…

It's important to note that the EMH doesn't suppose that all actors agree on the price. It just means that the price represents the summed outlook of participants. Those who think a stock is underpriced will bid it up to get more; those who think it is overpriced will sell out at progressively lowering prices. Because the movement in prices creates an opportunity to profit for those who have information that is not y…

Okay, so would I be correct to assume that you claim it is in the long run impossible to beat the market except by dumb luck?

I don't see how this follows from your reasoning. You've allowed the possibility of beating the market if an individual trader has some knowledge or insight which the average of the rest of the market does not. So presumably an investor which only acts when he has such knowledge would beat the market also in the long run.

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

#104

Post by jacques_chester » Sat, Aug 17, 2013, 9:47 AM UTC

marvin wrote: post #103

jacques_chester wrote: post #101

Earlier quoted context omitted.

It's important to note that the EMH doesn't suppose that all actors agree on the price. It just means that the price represents the summed outlook of participants. Those who think a stock is underpriced will bid it up to get more; those who think it is overpriced will sell out at progressively lowering prices. Because the movement in prices creates an opportunity to profit for those who have information that is not y…

Okay, so would I be correct to assume that you claim it is in the long run impossible to beat the market except by dumb luck? I don't see how this follows from your reasoning. You've allowed the possibility of beating the market if an individual trader has some knowledge or insight which the average of the rest of the market does not. So presumably an investor which only acts when he has such knowledge would beat the…

The EMH grew out of the empirical observation that prices wiggle around randomly (and the different forms look at different ways available information could be responsible for that).

Buffet himself, in the letter, has already said that most investors start with comparable amounts of information and capability. So speculating by buying and selling according to predictions of future values of stocks will eventually cause a regression to the mean.

Buffet disagrees with the EMH but he agrees with the conclusion that you can't beat the market by speculating on the movement of prices. He basically lets the random wiggle happen, and when a price dips to what he thinks is a bargain, he buys.

The problem is that we struggle to test the null hypothesis. We can't create 1,000 parallel 20th centuries with 1,000 Warren Buffets to see if he comes out significantly ahead a statistically meaningful number of times. We can only compare him to chance. In a sufficiently large sample, long streaks of perfect performance can emerge purely by chance.

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

#105

Post by marvin » Sat, Aug 17, 2013, 10:26 AM UTC

jacques_chester wrote: post #104

marvin wrote: post #103

Earlier quoted context omitted.

Okay, so would I be correct to assume that you claim it is in the long run impossible to beat the market except by dumb luck? I don't see how this follows from your reasoning. You've allowed the possibility of beating the market if an individual trader has some knowledge or insight which the average of the rest of the market does not. So presumably an investor which only acts when he has such knowledge would beat the…

The EMH grew out of the empirical observation that prices wiggle around randomly (and the different forms look at different ways available information could be responsible for that). Buffet himself, in the letter, has already said that most investors start with comparable amounts of information and capability. So speculating by buying and selling according to predictions of future values of stocks will eventually cau…

So what you're saying is that it may (or may not) be possible for an individual inevstor to consistently beat the market through skill, but that it is impossible to verify whether an investor who beat the market is in fact skilled or just lucky.

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

#106

Post by Pitarou » Sat, Aug 17, 2013, 10:37 AM UTC

I love this line:

> Wall Street abhors a commercial vacuum. If the will to believe stirs within the customer, the merchandise will be supplied -- without warranty.

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

#107

Post by dredmorbius » Sat, Aug 17, 2013, 11:12 AM UTC

nether wrote: post #8

dredmorbius wrote: post #6

Meta: QZ is utterly unreadable to me on both desktop and mobile. Fortunately there's Readability.

More meta: the article uses lowercase l to represent the digit 1.

Perl can do that in Underwood compatibility mode (obscure Perl Journal cover reference...).

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

#108

Post by foobarian » Sat, Aug 17, 2013, 11:18 AM UTC

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…

It's simple math. A money manager controlling 100% of the market by definition can't beat the average ;) So the potential for good performance must increase along that spectrum.

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

#109

Post by jacques_chester » Sat, Aug 17, 2013, 11:28 AM UTC

marvin wrote: post #105

jacques_chester wrote: post #104

Earlier quoted context omitted.

The EMH grew out of the empirical observation that prices wiggle around randomly (and the different forms look at different ways available information could be responsible for that). Buffet himself, in the letter, has already said that most investors start with comparable amounts of information and capability. So speculating by buying and selling according to predictions of future values of stocks will eventually cau…

So what you're saying is that it may (or may not) be possible for an individual inevstor to consistently beat the market through skill, but that it is impossible to verify whether an investor who beat the market is in fact skilled or just lucky.

I guess so. Naturally I secretly suspect in my heart of hearts that I am smart enough to out-perform the market ...

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

#110

Post by im3w1l » Sat, Aug 17, 2013, 11:48 AM UTC

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…

>It transfers money from uneducated investors to educated ones

And this is exactly what you "proved" could not happen