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

And yet Ed Thorpe, from 1969-88, had 227 months where he made money, and 3 where he lost. Over that time frame, he had a mean return of well north of 15%, with a standard deviation of 4%. What precisely did you prove? Edit - your arguments are incoherent - I, or most others who claim that some people can consistently beat the market, are not relying upon some mythical, eternal method. You're correct in that any such method will become public and therefore worthless. I imagine consistently winning takes constant work and innovation.

Furthermore, no is claiming that [i]anyone[/i] can "make huge sums of money systematically without risk," or that successful hedge funds that can turn 1 dollar into 1+r dollars can always turn 1e9 dollars into (1+r)e9 dollars, or even that there exists a single financial genius that can entirely eliminate risk.

What a collection of straw men you have succeeded in knocking down!

His point is that playing the market is "speculation", not investing. He differentiates this with "investing", where you simply try to assess the intrinsic value of a stock, and if the stock is trading at a significant discount to it, then you buy it.

Further, once you've bought it, you keep it. You don't try to time the ups and downs of the market, buying moving and out of the position quickly. Since this is how Buffett likes to invest, one of his key principles is investing in owner-operators or people that are behaving as such. You want the executives of the company to treat it as if they owned all the stock and could never sell it. Because when you have the people running the company worrying about next quarter, you're not worrying about next decade.

Also related, Buffett's two key rules to investing:

Rule #1. Never lose any money

Rule #2. Never break rule #1

Arg... Assume the entire population of fund managers, which is smaller than the population of the entire "market", has a mean return of 15%. Further, assume the market as a whole (superset including fund managers) has a mean return of 10%.

Under those conditions... in a sampling of 100 "typical fund managers", more than half would still produce higher returns than the market.

You made an implicit assumption, which I believe is probably correct, that fund managers as a population are an unbiased sampling of the entire market -- ie. that their returns are the same as the market (or worse) -- but provided no evidence to back it up.

I read all this 1975 dated letter and while I enjoyed every piece of it, this phrase contained in the very last page is what caught my attention the most:

"Conventional approaches to money management should not be expected to produce above average results."

It basically means that if you want to perform better than your competitors you logically should act differently from them. As in distancing yourself from the status quo.

I can see this advice being spot on for startups as well, it has everything to do with thinking outside of the box and redefining the rules of the game.

Good ole Warren nailed it decades ago.

> And yet Ed Thorpe, from 1969-88, had 227 months where he made money, and 3 where he lost.

First, he didn't beat the market average 227 times in a row -- for most of those periods, he didn't lose money, but then a buy & hold investor also didn't lose money. A meaningful comparison would have to compare his outcomes with that for a buy & hold investor riding the ascending market value by holding a boring, geriatric index fund.

Second, I wish people would study probability theory and statistics before trying to have conversation like this one. A totally random computer-generated market, with random trades, produces a handful of very spectacular outcomes, by chance alone. The larger the investor pool, the greater the chance for a spectacular chance performance.

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

In the above market model, which is a computer market driven by random trades, no intelligence, essentially flipping coins, out of 100 investors, the best performance over 30 years is $233,000 from an initial stake of $10,000 (an average performance would be $51,800). And if you increase the investor pool to millions like in real life, you greatly increase the size of the most spectacular performances.

Now imagine that the best performer is a human being instead of a computer model. What are the chances that he will say, "Oh, I was just lucky." For one thing, he might not understand enough probability theory to even grasp that chance could explain the outcome. For another, he might want to set himself up as a financial expert and make more money exploiting other people's stupidity than he ever made in equities.

> I imagine consistently winning takes constant work and innovation.

Imagine anything you like. There are no secrets of the winners. Prove this false using scientific evidence. Prove that spectacular performances cannot result from the workings of chance, as my computer model proves.

> ... your arguments are incoherent ...

Only to someone who has his mind made up and who cannot evaluate evidence. Imagine a group of people flipping coins -- how many people need there be, flipping fair coins, for one of them to have a 50% chance to flip heads 20 times in a row? And what is the chance for the lucky winner to say, "Oh well, it was probably a chance outcome"?

answer: 2^20 = 1,048,576 people.