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

#111

Post by marvin » Sat, Aug 17, 2013, 3:17 PM UTC

jacques_chester wrote: post #109

marvin wrote: post #105

Earlier quoted context omitted.

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 ...

If you believe Buffett's thesis that skilled value investors who do their homework consistently beat the market, it stands to reason that there should also be other strategies that consistently beat the market (let's say over 20 years or so). It also stands to reason that value investing, since it is such a heavily publicized strategy, probably does not beat the market today, since it is such a widely published and acknowledged strategy.

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

#112

Post by gaius » Sat, Aug 17, 2013, 3:58 PM UTC

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…

If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it, then that "system" would become the norm -- the market average performance

But this applies to any human endeavour! What's the secret to being successful in any field? Or rather, why aren't we all world-class concert pianists or martial artists or ballet dancers or whatever takes your fancy? Because knowing "the system" and practicing the system are very different things...

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

#113

Post by mdkess » Sat, Aug 17, 2013, 5:14 PM UTC

conanbatt wrote: post #43

mdkess wrote: post #4

Earlier quoted context omitted.

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,…

While I think The Intelligent Investor is a worthwhile book, I think it got it wrong for the very reasons I mentioned above.

Anyway, I'm not making any argument here for how the market works, other than pointing out that saying that half of fund managers do worse than the median does not imply that they are unskilled or not providing value. Nor am I saying that they do provide value, but rather the original theory is both flawed and insufficient to make a conclusion.

In games of skill, past results certainly give expectations of future results. Going back to the hockey analogy, I would expect the top 10% of performers over five years (determined by some metric) would as a whole outperform a random sample of 10% of the league in a sixth year. Madoff is a bad example here - he was breaking the law, but nobody knew. If you catch a top sports player doping, it doesn't suddenly mean that the game is a game of chance, or that all of the top performers are cheaters (although repeatedly catching cheaters may indicate systematic problems) - rather it means that someone cheated to fake performance. They were playing a different game, but nobody knew.

Going back to the original point, if you want to determine whether something is a game of chance or skill, you have to fix the prior.

Let's say we had coin flipping tournaments, and people were claiming that it's a game of skill. Looking at past statistics, some people seemed to perform far better than the expected 50-50 split. You however claim that coin flipping is just a game of chance. How do you prove it? You look at results for some period of time, say five years. Take the "winners" from that group - say the top 20% of performers. Under the hypothesis that it's a game of skill, these should be a selection of the most skilled people.

Now track their results for a sixth year. If it was a game of skill, the expectation would be that as a whole, these individuals would continue to perform at a high level. However, as a game of chance, you would expect performance to be completely random among these high performers - and by doing this, you can determine whether coin flipping is a game of chance or skill.

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

#114

Post by eli_gottlieb » Sat, Aug 17, 2013, 7:11 PM UTC

jacques_chester wrote: post #87

refurb wrote: post #72

Earlier quoted context omitted.

I think one particular problem with the strong-form efficient market hypotheses is this: A stock should already be priced for all of the publicly available information. However, that information has to be analyzed and interpreted. That's the catch. "Today company XYZ announced their purchase of Chinese company ABC." There are probably many different ways to interpret that information. Maybe the purchase will result i…

The EMH doesn't propose that participants have future knowledge. It says that current prices reflect current information and that in the long run, all participants regress to the mean.

Well yes, but he's still correct. Not all participants accurately gauge what the available information means for their positions, and even for those who do, figuring it out takes time.

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

#115

Post by nickff » Mon, Aug 19, 2013, 7:16 PM UTC

jcnnghm wrote: post #55

nickff wrote: post #49

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/Efficien…

The market is definitely not strong-form efficient. If it were, you wouldn't have any price movement attributable to earnings surprises, because the private information would already be priced in. More importantly, markets are only efficient because some people are researching and trading to the true underlying value. The whole reason markets are supposed to be efficient is because if they are not, there is an opport…

Strong form efficiency does not imply perfectly predictive of all future events. Such a claim would imply that no durable good could increase in price at a rate higher than the federal funds rate plus some risk premium (haircut).