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

#51

Post by lutusp » Sat, Aug 17, 2013, 12:53 AM UTC

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…

> He consistently beats the market and then claims that "managers" cannot.

But he isn't beating the market -- he's beating the pants off his followers, people who dutifully buy the same stocks he does. It's the announcement effect -- Buffett buys a given stock, Buffett is a winner, so everyone responds by buying the same stock: self-fulfilling prophecy.

The irony is that the timing of the groupie-purchases assures that money flows from them into Buffett's accounts, because the followers buy too late to benefit.

Another effect is that, if Buffett buys stock in a particular company, he is betting that company will grow. Potential customers notice this, prospective employees notice this, the public notices this: it's another self-fulfilling prophecy.

Is this a mere hypothesis? Yes, it is. Can it be proven? Only in principle, not in fact. Is Buffett actually a genius? Chances are no one will ever know, and it's certainly not science.

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

#52

Post by jholman » Sat, Aug 17, 2013, 12:59 AM UTC

I had a funny thought reading the letter (the actual letter at Forbes, not the vacuous qz.com summary).

The letter is type-written, with nice tables and footnotes. That probably means that it was either hand-written by Buffet or by a secretary (or stenographed or whatever), and then given to a typist to format.

In turn that means that some random lowly typist got to snoop on all this premium investment advice, that 20 years later would be becoming common wisdom. I wonder if she (I assume a typist in the 70s would be female) noticed and appreciated it, perhaps acted on it.

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

#53

Post by lutusp » Sat, Aug 17, 2013, 1:01 AM UTC

bhickey wrote: post #50

lutusp wrote: post #39

Earlier quoted context omitted.

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…

I agree with your point, but in the 21st century, I have a hard time accepting that many people ignore basic scientific principles -- in particular, the null hypothesis, which in essence says that a given proposition is assumed to be false until there's evidence for it.

> Plenty of otherwise rationally minded people have a hard time reasoning about this stuff.

Rationality is what rationality does. There's a devious investment scam that, once explained, seems obvious, but most people fall for it unless forewarned. I call it the "Miracle Man" scam. Here it is:

http://arachnoid.com/equities_myths/index.html#Miracle_Man

I would like to live in a world where a scam like "Miracle Man" couldn't work, because people would say "It seems too good to be true, therefore chances are it's not true."

But that's not this world, not by any means.

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

#54

Post by r0s » Sat, Aug 17, 2013, 1:04 AM UTC

The factor I think he missed: All those managers timing trades in their random way has a randomizing effect on the system overall.

But I'm not an economist, any ideas if or how that influence manifests?

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

#55

Post by jcnnghm » Sat, Aug 17, 2013, 1:12 AM UTC

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 opportunity to make riskless arbitrage profit, which someone will exploit.

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

#56

Post by [deleted] » Sat, Aug 17, 2013, 1:29 AM UTC

[deleted]

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

#57

Post by robbiep » Sat, Aug 17, 2013, 1:32 AM UTC

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…

Your simplification ruins the example because in the real world, as in lutusp's example, managers are investing in a portfolio of stocks, not 1 in 6 with a 1/6 chance of a 600% return.

There is a reason for market theory and the saying that you can't outperform the market in the long term: everything will average out.

Lutusp's example is perfectly adequate and theoretically sound

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

#58

Post by bunderbunder » Sat, Aug 17, 2013, 1:39 AM UTC

marvin wrote: post #48

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…

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 ;) )

For posterity, the key quote for those looking to intuit Buffett's view comes on page 13: "I'm convinced that there is much inefficiency in the market."

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

#59

Post by jholman » Sat, Aug 17, 2013, 1:44 AM UTC

lutusp wrote: post #44

klodolph wrote: post #36

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). 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 "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 them correct, all of them missing (or at least ignoring) your most-important point.

On the second count, that's like saying that math is the foundation of computing, and so the two are indistinguishable. klodolph is correct that the two are different, and it doesn't affect your point at all, so you should acknowledge the minor correction and stick to the relevant point.

More generally, did you notice that your top-level comment was basically saying "Warren Buffet is wrong about this aspect of investing"? You could be right, but it's not likely. I believe the reason for this mistake is that you may have have misread this sample of Buffet's thinking (and your overall claims as I understand them may actually agree with and Buffet as I understand him).

(In my humble understanding) 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, I note that all of your arguments are consistent with this. Your arguments revolve around being unable to determine which are which, after the fact; so do Buffet's! I further note that it seems ludicrous to claim that there do not exist anti-skilled investors, and thus all other investors will be more skilled than the mean skill level, and that this probably won't matter, because luck will drown it all out.

My overall points here are:

    * I agree with your high-level claims (as I understand them) about money-managers
    * I believe Warren Buffet, in this letter to Katherine Graham, agrees with
           your high-level claims
    * nearly every commenter in these threads agrees with your high-level claims
        * the comment by wheaties is a counter-example
    * some of the minor details of your points are technically wrong or confusing, 
           in ways that invite nit-picking, but do not impact your actual argument

On the other hand, starting on page 15 (of 19), Buffet suggests (and advocates) an alternative (his #5) that is NOT fully respectful of the efficient market hypothesis. So your position is not Buffet's entire position (though I see from your Equities Myths page that you have noticed this, and you suggest that perhaps Buffet is nothing except lucky).

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

#60

Post by robotcookies » Sat, Aug 17, 2013, 1:51 AM 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…

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.