Author Topic: Is Warren Buffett skilled or lucky?  (Read 23518 times)

sthubbar

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Is Warren Buffett skilled or lucky?
« on: April 03, 2014, 08:11:14 PM »
Warren Buffet seems to imply that his success is due to skills he has developed.

Some people, Nassim Taleb author of "Fooled by Randomness", says that given a large number of investors, one of them, purely by chance, must turn out to make lots of money.

Warren Buffet says "In the short term the market is a voting machine, in the long term a weighing machine".  I take this to mean that it is possible to take advantage of irrationally low priced stocks that in the long term will come back to their true value.

Efficient Market Hypothesis "EMH" implies that there are so many people trading and so much information available that stocks are, if not instantly, pretty much on average properly priced.

Warren Buffet says that he could care less if the market were to shut down for 5 or 10 years, as he buys quality companies for the long term.

Many investors seem to think it is not possible to predict 5 or 10 years into the future and it is important to actively watching their holding to take advantage of market fluctuations or avoid market dips.

I firmly want to believe that Warren Buffett is 80% skilled and 20% luck, just like a professional in most other disciplines.

Does this seem right or do you think he is 20% skilled and 80% luck?

Otsog

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Re: Is Warren Buffett skilled or lucky?
« Reply #1 on: April 03, 2014, 09:55:46 PM »
I really like Taleb, but don't totally follow his logic.  He was saying Soros success was less likely to be luck than Buffett's because Soros made more decisions.  One of Buffett's most common pieces of advice is patience, something humans are quite terrible at.  Every single business day Mr.Market is offering to buy your stock.  Being patient and not selling is a decision. It sounds easy, but is surpsingingly hard for humans in practice.

Also, Taleb may not be that familiar with Buffett since Taleb claimed Buffett only had one strategy (to buy companies with certain earnings profiles).  That is pretty far from the truth.  Buffett has done arbitrage, derivatives, debt, private takeover etc. his whole career, he just doesn't encourage non-professionals to use those strategies.  His style has also changed by necessity over the years.  Managing 1 million, 100 million, 1 billion and 100 billion dollars are all very different undertakings and require different strategies. 

I'd highly recommend reading Buffett: an American Capitalist or Snowball if you really want to get a glimpse of how Buffett works.

Personally I think he his 100% skill.  As he himself has said his luck was winning the ovarian lottery.  It doesn't get much easier than being born a middle class white male in 20th century America.
« Last Edit: April 03, 2014, 10:02:13 PM by Otsog »

kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #2 on: April 03, 2014, 10:04:18 PM »
Buffett just does factor investing similar to a small/value tilter (but slightly more nuanced). There is extremely strong evidence that Buffett isn't skilled at all, which of course is what the math long ago predicted. This is perhaps the most prestigious study on the topic though by no means is it the only one. Rather, he just chose an intelligent strategy from the outset and stuck to it. It's more mechanical than anything.

http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf
« Last Edit: April 03, 2014, 10:10:00 PM by kyleaaa »

Otsog

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Re: Is Warren Buffett skilled or lucky?
« Reply #3 on: April 04, 2014, 12:10:04 AM »
How does applying a successful strategy over decades that literally no one in the entire world can match be mechanical and take no skill?

That's like saying Michael Jordan just had the best basketball strategy and it was really just doing the mechanical motions, he didn't have any skill. 

Ian

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Re: Is Warren Buffett skilled or lucky?
« Reply #4 on: April 04, 2014, 12:12:10 AM »
Whatever Warren Buffet was, what he is now is Warren Buffet. He is not playing by the same rules as other investors anymore.

Otsog

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Re: Is Warren Buffett skilled or lucky?
« Reply #5 on: April 04, 2014, 12:54:28 AM »
He plays by literally the exact same rules. 

His game is tougher because it is a lot harder to find appropriate investments when your assets are in the hundreds of billions. 

If you are referring to deals he gets those deals are available to anyone with billions of dollars of liquid assets and a stellar business reputation 5 decades long.  Is there anyone else in the entire world who you can call up and get $10 billion of financing from in 5 minutes? 

DaKini

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Re: Is Warren Buffett skilled or lucky?
« Reply #6 on: April 04, 2014, 01:54:56 AM »
Quote
Does this seem right or do you think he is 20% skilled and 80% luck?
The problem with this is subjective perception.

Even if it would be 100% luck, our human brains would rationalize it away as skill. Humans are very bad in accepting or even perceiving randomness.

Anyways, i agree that long term buy and hold (a fairly simple and easy strategy with index funds) takes skill: You need to dont act when everyone around panics and be like odysseus in the odyssee in regards to the financial media (taleb made thios very well pucture).
However, one must not only see this developed reality we live in where buffet became rich, but also all those other hypotethical alternative realitys where he ended up broke. I bet there was a very big "luck" component that allowed him to develop and use his skills and that tha latter is a minor fraction compared to the lick component.
Taleb was a very good read for me but i think that the content is not easy to get - especially with all consequences that follow. This is also because our brain is not designed to understand these kind of things.

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #7 on: April 04, 2014, 02:18:47 AM »
He plays by literally the exact same rules. 

His game is tougher because it is a lot harder to find appropriate investments when your assets are in the hundreds of billions.

I disagree.

He has MUCH more information than the average investor, and can thoroughly vet a company where you'd be stuck reading the financials.  If you can't afford your own corporate spies, you will always be at a disadvantage to those who can.

innerscorecard

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Re: Is Warren Buffett skilled or lucky?
« Reply #8 on: April 04, 2014, 07:13:48 AM »
It's absurd on its face to say that Buffett has or had no special investment skill.

Buffett made his initial money by essentially picking stocks with public information (and doing due diligence by himself - travelling to small companies across the country and meeting management, visiting factories, etc.). He didn't have a lot of money, and smashed index returns. These were the Buffett Partnership years. Incidentally, Walter Schloss basically did this minus the due diligence for decades and consistently achieved above market returns. Buffett, Schloss, and the other super-investors of Graham and Doddsville have consistently generated alpha over many market cycles across different market conditions. Lightning has struck the same group of people over and over again.

Buffett still picks stocks...but not like you and I. His investment universe is much smaller than ours. He needs to go after elephants that meaningfully move the needle at Berkshire. For those elephants, his unparalleled business connections now offer him fantastic deals and opportunities not available to most. You can't copy what Buffett is doing today (well, you can on a lesser scale if you are Tom Gayner at Markel or other Buffett-style investors at a bunch of other mini-Berkshires).

Although the market is much more efficient than it was in the '50s (no more domestic net-nets really), Buffett has said as late as the late '90s/early '00s that if he had lower assets under management today ($1 million or even $10 million) he is confident he could get 50% returns each year. And he wasn't kidding. But I doubt he'd do it the same way he did in the '50s - by looking at domestic equities. He'd look at odd securities of all sorts, such as weird kinds of illiquid debt and securities in emerging markets.

schimt

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Re: Is Warren Buffett skilled or lucky?
« Reply #9 on: April 04, 2014, 07:56:50 AM »
My knowledge on Buffet is very limited, but i was under the impression that he takes an active invovlement with the management of companies he is invested in and actually has influence on improving the situations of these companies, there by increasing the probability of them making more money in the future.

To me, this approach is mostly skill and not the luck that we read about for the few active investors that have done well.

soccerluvof4

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Re: Is Warren Buffett skilled or lucky?
« Reply #10 on: April 04, 2014, 07:58:34 AM »
If he didn't have them , he sure learned them. To say he is lucky is moronic.

Otsog

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Re: Is Warren Buffett skilled or lucky?
« Reply #11 on: April 04, 2014, 08:16:39 AM »
He plays by literally the exact same rules. 

His game is tougher because it is a lot harder to find appropriate investments when your assets are in the hundreds of billions.

I disagree.

He has MUCH more information than the average investor, and can thoroughly vet a company where you'd be stuck reading the financials.  If you can't afford your own corporate spies, you will always be at a disadvantage to those who can.

I agree he has much more information. He reads all the time.  He reads more financials than anyone. He's read the annual reports of companies every year, for 50 years, that he has never invested in. He is a machine at consuming and processing information.

I think it's weird that in 50 years there has never been any evidence, or even accusations of insider trading, if he is relying on corporate spies.

Foster

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Re: Is Warren Buffett skilled or lucky?
« Reply #12 on: April 04, 2014, 08:21:27 AM »
Skilled, 100%. Luck is just when skill/preparedness is finds good opportunities.

Highly recommend reading Buffet: The Making of an American Capitalist to learn about not only his investment strategies, but also his mindset, demeanor and frugality. Very interesting read.

Roland of Gilead

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Re: Is Warren Buffett skilled or lucky?
« Reply #13 on: April 04, 2014, 08:41:09 AM »
Lucky.  How can you call someone who is 83 years old and still able to run a business successfully while most other octogenarians have trouble finding the right channel for Wheel of Fortune anything but lucky?

soccerluvof4

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Re: Is Warren Buffett skilled or lucky?
« Reply #14 on: April 04, 2014, 08:55:09 AM »
Lucky.  How can you call someone who is 83 years old and still able to run a business successfully while most other octogenarians have trouble finding the right channel for Wheel of Fortune anything but lucky?


Because it doesnt matter how old he is today he is mostly the face now. He was smart enough to hire smart people around him and teach them his principles. Kinda like the old Ford story. Doesnt matter how smart I am I have a panel of buttons and behind each button I have the smartest person to answer to me. I am a great buttom pusher. Something like that! haha

kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #15 on: April 04, 2014, 12:38:48 PM »
How does applying a successful strategy over decades that literally no one in the entire world can match be mechanical and take no skill?

That's like saying Michael Jordan just had the best basketball strategy and it was really just doing the mechanical motions, he didn't have any skill.

Huh? Lots of other people have applied those factors. And it isn't AT ALL like saying Michael Jordon just had the best basketball strategy and it was really just doing the mechanical motions. No analogy could possibly be more wrong.

kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #16 on: April 04, 2014, 12:40:34 PM »
It's absurd on its face to say that Buffett has or had no special investment skill.

Buffett made his initial money by essentially picking stocks with public information (and doing due diligence by himself - travelling to small companies across the country and meeting management, visiting factories, etc.). He didn't have a lot of money, and smashed index returns. These were the Buffett Partnership years. Incidentally, Walter Schloss basically did this minus the due diligence for decades and consistently achieved above market returns. Buffett, Schloss, and the other super-investors of Graham and Doddsville have consistently generated alpha over many market cycles across different market conditions. Lightning has struck the same group of people over and over again.

Buffett still picks stocks...but not like you and I. His investment universe is much smaller than ours. He needs to go after elephants that meaningfully move the needle at Berkshire. For those elephants, his unparalleled business connections now offer him fantastic deals and opportunities not available to most. You can't copy what Buffett is doing today (well, you can on a lesser scale if you are Tom Gayner at Markel or other Buffett-style investors at a bunch of other mini-Berkshires).

Although the market is much more efficient than it was in the '50s (no more domestic net-nets really), Buffett has said as late as the late '90s/early '00s that if he had lower assets under management today ($1 million or even $10 million) he is confident he could get 50% returns each year. And he wasn't kidding. But I doubt he'd do it the same way he did in the '50s - by looking at domestic equities. He'd look at odd securities of all sorts, such as weird kinds of illiquid debt and securities in emerging markets.

It's important to note that smashing index returns is not indicative of skill. Skill can be measured relatively accurately. Buffett's alpha is the result of factor exposure, not skill. This is easily-demonstrable with math. Taking on more risk in order to get higher returns is NOT skill.

kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #17 on: April 04, 2014, 12:41:37 PM »
It's absurd on its face to say that Buffett has or had no special investment skill.

Buffett made his initial money by essentially picking stocks with public information (and doing due diligence by himself - travelling to small companies across the country and meeting management, visiting factories, etc.). He didn't have a lot of money, and smashed index returns. These were the Buffett Partnership years. Incidentally, Walter Schloss basically did this minus the due diligence for decades and consistently achieved above market returns. Buffett, Schloss, and the other super-investors of Graham and Doddsville have consistently generated alpha over many market cycles across different market conditions. Lightning has struck the same group of people over and over again.

Buffett still picks stocks...but not like you and I. His investment universe is much smaller than ours. He needs to go after elephants that meaningfully move the needle at Berkshire. For those elephants, his unparalleled business connections now offer him fantastic deals and opportunities not available to most. You can't copy what Buffett is doing today (well, you can on a lesser scale if you are Tom Gayner at Markel or other Buffett-style investors at a bunch of other mini-Berkshires).

Although the market is much more efficient than it was in the '50s (no more domestic net-nets really), Buffett has said as late as the late '90s/early '00s that if he had lower assets under management today ($1 million or even $10 million) he is confident he could get 50% returns each year. And he wasn't kidding. But I doubt he'd do it the same way he did in the '50s - by looking at domestic equities. He'd look at odd securities of all sorts, such as weird kinds of illiquid debt and securities in emerging markets.

It's important to note that smashing index returns is not indicative of skill. Skill can be measured relatively accurately. Buffett's alpha is the result of factor exposure, not skill. This is easily-demonstrable with math. Taking on more risk in order to get higher returns is NOT skill.

Also note that saying he isn't skilled is NOT the same as saying he got lucky. People for some reason assume no skill = he got lucky. Not at all. The math explicitly proves he didn't get lucky.

smedleyb

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Re: Is Warren Buffett skilled or lucky?
« Reply #18 on: April 04, 2014, 12:52:27 PM »
The boundary between skill and luck is a constantly shifting mirage.   

In other words, those with skill make their own luck, and those with no luck at all lack skill. 


acroy

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Re: Is Warren Buffett skilled or lucky?
« Reply #19 on: April 04, 2014, 12:55:50 PM »
100%+ skill. He is very very smart at what he does.

There are speculators, there are investors... then there is Buffet. He's the man!!

Poorman

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Re: Is Warren Buffett skilled or lucky?
« Reply #20 on: April 04, 2014, 01:24:15 PM »
It's absurd on its face to say that Buffett has or had no special investment skill.

Buffett made his initial money by essentially picking stocks with public information (and doing due diligence by himself - travelling to small companies across the country and meeting management, visiting factories, etc.). He didn't have a lot of money, and smashed index returns. These were the Buffett Partnership years. Incidentally, Walter Schloss basically did this minus the due diligence for decades and consistently achieved above market returns. Buffett, Schloss, and the other super-investors of Graham and Doddsville have consistently generated alpha over many market cycles across different market conditions. Lightning has struck the same group of people over and over again.

Buffett still picks stocks...but not like you and I. His investment universe is much smaller than ours. He needs to go after elephants that meaningfully move the needle at Berkshire. For those elephants, his unparalleled business connections now offer him fantastic deals and opportunities not available to most. You can't copy what Buffett is doing today (well, you can on a lesser scale if you are Tom Gayner at Markel or other Buffett-style investors at a bunch of other mini-Berkshires).

Although the market is much more efficient than it was in the '50s (no more domestic net-nets really), Buffett has said as late as the late '90s/early '00s that if he had lower assets under management today ($1 million or even $10 million) he is confident he could get 50% returns each year. And he wasn't kidding. But I doubt he'd do it the same way he did in the '50s - by looking at domestic equities. He'd look at odd securities of all sorts, such as weird kinds of illiquid debt and securities in emerging markets.

It's important to note that smashing index returns is not indicative of skill. Skill can be measured relatively accurately. Buffett's alpha is the result of factor exposure, not skill. This is easily-demonstrable with math. Taking on more risk in order to get higher returns is NOT skill.

What would Buffett have to do in your mind to prove that it was indeed skill?  Or is that possibility completely out of the question for you?

What he does is pretty simple... Purchase companies with an economic advantage that can't be easily overtaken by competitors (a wide moat) for a reasonable price.  His two skill sets are in recognizing the moats when others can't or don't, and in valuing the enterprises accurately.  He doesn't explicitly share his metrics for doing this because they are his competitive advantages.

People seeking to "achieve alpha" don't think in the same terms as Buffett, and therefore, can't duplicate his success.  So to them it must look like luck or excessive risk taking.

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Re: Is Warren Buffett skilled or lucky?
« Reply #21 on: April 04, 2014, 01:28:03 PM »
Does it matter?

Can you do what Buffett does? If yes, congratulations on your untold millions of millions of dollars and successful business running. If no, thank you for joining the rest of the bell curve. I hear there are these fancy things called index funds that minimize costs while you study your way up to the yes category. ;)

Ian

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Re: Is Warren Buffett skilled or lucky?
« Reply #22 on: April 04, 2014, 04:28:20 PM »
If you are referring to deals he gets those deals are available to anyone with billions of dollars of liquid assets and a stellar business reputation 5 decades long.  Is there anyone else in the entire world who you can call up and get $10 billion of financing from in 5 minutes?
Looks like our disagreement goes deep, because I'd say that's a pretty good description of playing by different rules. Just because other people could hypothetically have positioned themselves so as to have his advantages does not mean that they're playing the same game. If all you mean to say is that he began with the same rules, then we don't disagree: I was trying to say that the beginnings of great wealth or a stellar reputation (regardless of if they come from skill or luck) create momentum and self-fulfilling trends that alter all future decisions.

The easiest example of this comes from the 2008 crisis. Buffett had banks coming to him and begging for an investment, not because the money made a huge difference (hundreds of billions were already being moved around) but purely because of his reputation. Because he had so much power in those transactions, he was able to buy them well below cost with absurdly good dividends. If you're saying that's the advantage you earn by winning the game in the past, fine. I'm just saying that you can't really compare his decisions and returns in recent years to other people, because he's not vaguely equivalent to other investors - he's Warren Buffett.

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Re: Is Warren Buffett skilled or lucky?
« Reply #23 on: April 04, 2014, 04:46:16 PM »
If you are referring to deals he gets those deals are available to anyone with billions of dollars of liquid assets and a stellar business reputation 5 decades long.  Is there anyone else in the entire world who you can call up and get $10 billion of financing from in 5 minutes?
Looks like our disagreement goes deep, because I'd say that's a pretty good description of playing by different rules.

That doesn't make the rules different.  He plays by the same rules as everyone else.  He just has different opportunities.

Sounds like you have a terminology problem/disagreement, but it seems you both agree that he has access to certain things due to his size, connections, reputation, etc.
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kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #24 on: April 04, 2014, 04:50:10 PM »
What would Buffett have to do in your mind to prove that it was indeed skill?  Or is that possibility completely out of the question for you?

Simple: he would have to generate alpha not attributable to any mechanical factors. In the past, he hasn't done this.  The possibility certainly isn't out of the question because there are SOME people out there whose performance appears attributable to skill. Buffett isn't one of them.

What he does is pretty simple... Purchase companies with an economic advantage that can't be easily overtaken by competitors (a wide moat) for a reasonable price.  His two skill sets are in recognizing the moats when others can't or don't, and in valuing the enterprises accurately.  He doesn't explicitly share his metrics for doing this because they are his competitive advantages.

People seeking to "achieve alpha" don't think in the same terms as Buffett, and therefore, can't duplicate his success.  So to them it must look like luck or excessive risk taking.

None of that is indicative of skill. And literally THOUSANDS of people have duplicated Buffett's success. He isn't unique in any way.

Note that I EXPLICITLY said he wasn't lucky. The data indicates Buffett isn't lucky. The data also indicates he isn't skilled. But most people think "if he wasn't lucky, it must be skill." That isn't even remotely true. There are a billion other possibilities besides skilled or lucky. Competent might be a reasonable term, but certainly not skilled, because he doesn't, hasn't, and can't do something everybody else can't do.

« Last Edit: April 04, 2014, 04:55:01 PM by kyleaaa »

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #25 on: April 04, 2014, 04:57:29 PM »
He plays by literally the exact same rules. 

His game is tougher because it is a lot harder to find appropriate investments when your assets are in the hundreds of billions.

I disagree.

He has MUCH more information than the average investor, and can thoroughly vet a company where you'd be stuck reading the financials.  If you can't afford your own corporate spies, you will always be at a disadvantage to those who can.

I agree he has much more information. He reads all the time.  He reads more financials than anyone. He's read the annual reports of companies every year, for 50 years, that he has never invested in. He is a machine at consuming and processing information.

I think it's weird that in 50 years there has never been any evidence, or even accusations of insider trading, if he is relying on corporate spies.

Insider trading can be actionable or non-actionable.  If he trades based on direct knowledge of deals, it's actionable.  If he trades based on knowledge gleaned from non-management positions, it's non-actionable.  Something as simple as a plant telling him that there's tons of overtime versus hours being cut can give an idea if the quarter is likely to be good.  In the case of a buyout, sending someone in to observe the management can give him an idea if they're actually good or just look that way on paper.

Corporate spying doesn't have to be sinister or illegal.  It's just a useful tool for those (like Buffet) who can afford to use it.

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Re: Is Warren Buffett skilled or lucky?
« Reply #26 on: April 04, 2014, 05:42:09 PM »
Insider trading can be actionable or non-actionable.  If he trades based on direct knowledge of deals, it's actionable.  If he trades based on knowledge gleaned from non-management positions, it's non-actionable.  Something as simple as a plant telling him that there's tons of overtime versus hours being cut can give an idea if the quarter is likely to be good.  In the case of a buyout, sending someone in to observe the management can give him an idea if they're actually good or just look that way on paper.

Corporate spying doesn't have to be sinister or illegal.  It's just a useful tool for those (like Buffet) who can afford to use it.

If Buffett was paying corporate spies that story would be on the front of every business publication in the world within a week.  He has been operating publicly for ~50 years and not only is there not a single shred of evidence of what you are insinuating, there has never even been a public accusation.  This is getting into pretty deep tin-foil-hat logic.

Otsog

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Re: Is Warren Buffett skilled or lucky?
« Reply #27 on: April 04, 2014, 05:46:09 PM »
None of that is indicative of skill. And literally THOUSANDS of people have duplicated Buffett's success. He isn't unique in any way.

Literally no-one has duplicated Buffett's success.  48 years of 19.7% BVPS compounding has been done by thousands of people? C'mon, seriously?

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Re: Is Warren Buffett skilled or lucky?
« Reply #28 on: April 04, 2014, 05:52:54 PM »
If you are referring to deals he gets those deals are available to anyone with billions of dollars of liquid assets and a stellar business reputation 5 decades long.  Is there anyone else in the entire world who you can call up and get $10 billion of financing from in 5 minutes?
Looks like our disagreement goes deep, because I'd say that's a pretty good description of playing by different rules. Just because other people could hypothetically have positioned themselves so as to have his advantages does not mean that they're playing the same game. If all you mean to say is that he began with the same rules, then we don't disagree: I was trying to say that the beginnings of great wealth or a stellar reputation (regardless of if they come from skill or luck) create momentum and self-fulfilling trends that alter all future decisions.

The easiest example of this comes from the 2008 crisis. Buffett had banks coming to him and begging for an investment, not because the money made a huge difference (hundreds of billions were already being moved around) but purely because of his reputation. Because he had so much power in those transactions, he was able to buy them well below cost with absurdly good dividends. If you're saying that's the advantage you earn by winning the game in the past, fine. I'm just saying that you can't really compare his decisions and returns in recent years to other people, because he's not vaguely equivalent to other investors - he's Warren Buffett.

Fair enough.  I think we pretty much agree :)

When reading Snowball and other Buffett stuff it should be noted that his 'advantage you earn by winning the game in the past' wasn't just luck but meticulously planned.  From early on Buffett placed an extremely high value on trust and business reputation, he has a sense of pride about doing handshake deals.

jawisco

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Re: Is Warren Buffett skilled or lucky?
« Reply #29 on: April 04, 2014, 06:13:40 PM »
I agree with 100% skill.  The man is amazing.  He plays by the rules - and proves that you don't need to cheat to win. 

And if you read his annual letter, and look back at the last 30+ years of investing, you can see that he was honest and open about the way he saw the world of investing.  You could of made a ton by just reading his letter and following his free advice.


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Re: Is Warren Buffett skilled or lucky?
« Reply #30 on: April 04, 2014, 06:36:37 PM »
Where does one draw the line between luck and skill?
Say a professional hitter has on average a .500 hitting average. Some are higher, some are lower, but the overall average is always drawn to .500
Sometimes a batter will hit multiple balls in succession, a so-called lucky streak.
Sometimes a batter will miss multiple balls in succession, a so-called unlucky streak.

Then comes along one single player who miraculously hits .800 of his at-bats. Some called it a lucky streak, the first few years. No he didn't hit all of the balls, mathematically it was just not possible, but more often than not, he hit more than others.
First year, the papers went wild about his peculiar success, noting his luck and insane innate ability. By the second year, no one thought he could carry on. By the third year, everyone actually expected him to hit .800 and it was by now old news.

Now, what differentiates between a batter that was lucky, and one that was skilled? If the batter never practiced a day in his life, just picked up the bat and swung and somehow hit .800, is that luck?

What if I told you the baseball player lived breathe, ate, slept batting. He dove in to the theory behind it, worked and practiced every day, tried new theories, tossed out old theories. Infact, he spent more hours focusing on batting than you've done attempting any one thing in your lifetime. Now when he goes to bat, he simply follows what he's been doing all along: and 'miraculously' he ends up with an .800 average far above the average bloke. Does this make him skilled?

One final thought: what if he performed all of that practice and hard work, and at the end of his line, he was still only stuck with a .500 batting average, no better than anyone else. What if his average actually dragged and he did slightly worse?

Perhaps you should admit that good results comes from hard work.
But hard work will not magically produce good results.

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #31 on: April 04, 2014, 07:11:06 PM »
Insider trading can be actionable or non-actionable.  If he trades based on direct knowledge of deals, it's actionable.  If he trades based on knowledge gleaned from non-management positions, it's non-actionable.  Something as simple as a plant telling him that there's tons of overtime versus hours being cut can give an idea if the quarter is likely to be good.  In the case of a buyout, sending someone in to observe the management can give him an idea if they're actually good or just look that way on paper.

Corporate spying doesn't have to be sinister or illegal.  It's just a useful tool for those (like Buffet) who can afford to use it.

If Buffett was paying corporate spies that story would be on the front of every business publication in the world within a week.  He has been operating publicly for ~50 years and not only is there not a single shred of evidence of what you are insinuating, there has never even been a public accusation.  This is getting into pretty deep tin-foil-hat logic.

Likewise, there's no evidence he hasn't.  And he does have motive.

He has a lot of fans here, and some of you may have unrealistic expectations of an investing idol.  He didn't get where he is today without grabbing every legal opportunity to enhance share value.  With that in mind, I don't know of a rational explanation why he wouldn't have a network of people who gather knowledge.

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Re: Is Warren Buffett skilled or lucky?
« Reply #32 on: April 04, 2014, 07:27:05 PM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.
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Vjklander

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Re: Is Warren Buffett skilled or lucky?
« Reply #33 on: April 04, 2014, 07:58:22 PM »
Buffett is a mathematical savant, somewhat socially inept, and quite OCD. Gotta luv him ....

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #34 on: April 04, 2014, 08:00:32 PM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.

Accusing Buffet of having more inside information than street investors is nasty?

Making good decisions is his responsibility, and if that means he gathers intelligence on potential quality problems or employee morale in a company before increasing his share stake, it's not nasty.  I'd view it as due diligence.  Gathering that information from (rear looking) management could be hit or miss, while gathering it straight from the (forward looking) assembly line would be pretty accurate.  Could you fault him for wanting both viewpoints? 

Corporate spying can be bad, but it doesn't have to be.  Buffet has both the means and motivation to use it for good purposes. 

 

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Re: Is Warren Buffett skilled or lucky?
« Reply #35 on: April 04, 2014, 10:41:29 PM »
Looks like some of you have your mind completely made up from the beginning.

beltim

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Re: Is Warren Buffett skilled or lucky?
« Reply #36 on: April 04, 2014, 11:05:25 PM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.

Accusing Buffet of having more inside information than street investors is nasty?


You accused him of insider trading.  Insider trading is illegal.  Accusing someone of an illegal act in the absence of any proof is quite nasty.

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #37 on: April 05, 2014, 12:30:24 AM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.

Accusing Buffet of having more inside information than street investors is nasty?


You accused him of insider trading.  Insider trading is illegal.  Accusing someone of an illegal act in the absence of any proof is quite nasty.

I view the "nasty" comments as a personal attack, and have not accused Buffet of anything illegal.  Your blanket statement of insider trading being illegal is incorrect.  Some forms are allowed, while others aren't. 

Shareholders expect Buffet to be aware of, and exploit, the loopholes.  It's his duty.

"Buy the rumor, sell the news" is not illegal.  My prior example of using observations of overtime hours to estimate quarterly earnings is a good example of such a rumor.  It isn't protected knowledge, and employees openly chat about OT on the internet.  Little things like that are chatter to Main Street, but to Buffet, they can mean a 5% lower entry point as shares dip on lower than expected earnings. 

He has other advantages we don't.  If his own sales (quite a statistical universe) suck in a given quarter, he can make good guesses about other companies.  If his railroads have a big change in volume, he can use that information, too.  For that matter, he could take a guess on McDonalds based on his ketchup packet sales.

He doesn't have to be luckier or more talented than you or I.  He can get better returns simply through having more data.





beltim

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Re: Is Warren Buffett skilled or lucky?
« Reply #38 on: April 05, 2014, 12:45:41 AM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.

Accusing Buffet of having more inside information than street investors is nasty?


You accused him of insider trading.  Insider trading is illegal.  Accusing someone of an illegal act in the absence of any proof is quite nasty.

I view the "nasty" comments as a personal attack, and have not accused Buffet of anything illegal.  Your blanket statement of insider trading being illegal is incorrect.  Some forms are allowed, while others aren't. 

Shareholders expect Buffet to be aware of, and exploit, the loopholes.  It's his duty.

"Buy the rumor, sell the news" is not illegal.  My prior example of using observations of overtime hours to estimate quarterly earnings is a good example of such a rumor.  It isn't protected knowledge, and employees openly chat about OT on the internet.  Little things like that are chatter to Main Street, but to Buffet, they can mean a 5% lower entry point as shares dip on lower than expected earnings. 

He has other advantages we don't.  If his own sales (quite a statistical universe) suck in a given quarter, he can make good guesses about other companies.  If his railroads have a big change in volume, he can use that information, too.  For that matter, he could take a guess on McDonalds based on his ketchup packet sales.

He doesn't have to be luckier or more talented than you or I.  He can get better returns simply through having more data.

You're talking about him buying another company based on material nonpublic information (and you used the words insider trading).  That's the definition of illegal insider trading: https://www.sec.gov/answers/insider.htm
« Last Edit: April 05, 2014, 12:48:06 AM by beltim »

fixer-upper

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Re: Is Warren Buffett skilled or lucky?
« Reply #39 on: April 05, 2014, 01:45:28 AM »

You're talking about him buying another company based on material nonpublic information (and you used the words insider trading).  That's the definition of illegal insider trading: https://www.sec.gov/answers/insider.htm

Otsog is the one who brought up insider trading, so please sacrifice him to the WB altar rather than me.  And rather than flames or snarky comments, simple yes-no answers to these questions will answer whether Buffet plays by the same rules we do.

If you had an army of sales people listening to customers talk, could you make better investment choices? 

Would it be illegal to postpone buying a company where your salesman said the staff was worried about being laid off?

If your business started getting a flood of applicants from a competitor, would it be illegal to short your competitor?

If you owned a freight business, and noticed your lumber traffic was up 10%, would it be illegal to accelerate your purchases of Home Depot?

If you sold ketchup packets, and your net sales were down for a quarter, would it be illegal to postpone your purchase of McDonald's stock?

Does Buffet have the army of salesmen, the railroad, the ketchup packet business, and the best lawyers to advise him on the legality of using his mountain of information? 

Does Berkshire represent a large enough cross-section of our economy to make an educated guess of the jobs number before the labor department releases their numbers?

These methods don't rely on direct insider information of a certain stock being bought/sold, and it would be a stretch to label them as insider trading. 

« Last Edit: April 05, 2014, 02:15:24 AM by fixer-upper »

kyleaaa

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Re: Is Warren Buffett skilled or lucky?
« Reply #40 on: April 05, 2014, 07:34:06 AM »
None of that is indicative of skill. And literally THOUSANDS of people have duplicated Buffett's success. He isn't unique in any way.

Literally no-one has duplicated Buffett's success.  48 years of 19.7% BVPS compounding has been done by thousands of people? C'mon, seriously?

Plenty of people have done significantly better, actually. Buffett is extremely competent, but he is not skilled. I'm not sure how somebody can look at absolute proof of that (see the link I posted above) and still argue that he's skilled.

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Re: Is Warren Buffett skilled or lucky?
« Reply #41 on: April 05, 2014, 07:47:52 AM »
None of that is indicative of skill. And literally THOUSANDS of people have duplicated Buffett's success. He isn't unique in any way.

Literally no-one has duplicated Buffett's success.  48 years of 19.7% BVPS compounding has been done by thousands of people? C'mon, seriously?


Plenty of people have done significantly better, actually. Buffett is extremely competent, but he is not skilled. I'm not sure how somebody can look at absolute proof of that (see the link I posted above) and still argue that he's skilled.

kyleaaa,

  1)  The link above abstract says "Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks."  So you agree it is not luck, as that is what the article you supply says?

  2)  Please list the "thousands" of people that have duplicated his success, in particular the 48 years part.  Or even 1.

  3)  You seem to imply that skill = unique.  I don't understand this.  A professional classical musician does nothing unique.  They are playing music that thousands of people have played before and trying to do it in a specific way that all those other people have been trying.  Of course, their particular way will be unique, just as the stock that WB purchased, in the particular quantities and at the particular time were unique, otherwise there would be a twin of WB.  It seem clear to me that the musician and WB both are skilled, despite doing activities that others do.  It is their particular way of doing the activities that equal skill.  How is what he does not skill?

TreeTired

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Re: Is Warren Buffett skilled or lucky?
« Reply #42 on: April 05, 2014, 07:56:07 AM »
Quote
Some people, Nassim Taleb author of "Fooled by Randomness", says that given a large number of investors, one of them, purely by chance, must turn out to make lots of money.

That is pretty funny, because Buffett himself used the same argument in a fairly famous speech a long time ago (before Taleb was born? ok, not quite )      The thrust of that speech was several examples of how the followers of Graham and value investing have produced superior returns over extended periods of time.

This is Buffett in 1984, so it strikes me as hilarious that Taleb is using this same "statistical analysis" to suggest that Buffett is lucky.   
Quote
"I would like you to imagine a national coin-flipping contest." Let's imagine all 268 million people in the United States are asked to wager one dollar on their ability to call the flip of a coin. "If they call correctly, they win a dollar from those who called wrong." After each flip the losers drop out, and on the subsequent flip the stakes multiply. Each person has a 50-50 chance of calling each flip and approximately half of the people will lose and drop out each round. After ten flips there would be approximately 260,000 people that had successfully called ten consecutive coin flips. After 20 flips, based purely on chance, there would be approximately 250 people that had called 20 consecutive coin flips - a seemingly miraculous feat.

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

« Last Edit: April 05, 2014, 08:02:26 AM by NC_MJ »

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Re: Is Warren Buffett skilled or lucky?
« Reply #43 on: April 05, 2014, 08:05:28 AM »
250 people might predict 20 consecutive coin flips, but about 1 person predicts 28 consecutive coin flips, and about 0.000001 people predict 48 consecutive coin flips. That is, there's about a one in a million chance that someone, out of all Americans, would correctly predict 48 consecutive coin flips.

Even if you treat each year as just a coin flip (beat the market that year, or not), then Warren Buffett still doesn't look merely lucky.
« Last Edit: April 05, 2014, 08:07:36 AM by warfreak2 »

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Re: Is Warren Buffett skilled or lucky?
« Reply #44 on: April 05, 2014, 09:54:51 AM »
Likewise, there's no evidence he hasn't. 

There's also no evidence you haven't raped and murdered. But generally we don't try to prove negatives.

And accusations without proof are pretty nasty things.

Accusing Buffet of having more inside information than street investors is nasty?


You accused him of insider trading.  Insider trading is illegal.  Accusing someone of an illegal act in the absence of any proof is quite nasty.

I view the "nasty" comments as a personal attack, and have not accused Buffet of anything illegal.  Your blanket statement of insider trading being illegal is incorrect.  Some forms are allowed, while others aren't. 


Although what you say is true as a matter of plain meaning and even some aspects of specialized meaning (e.g., an "insider trading policy" addresses permitted and impermissible trading by certain persons), I think it's clear when it's used to refer to illegal securities transactions (e.g., within the most common federal framework, to mean trading while in possession of material, non-public information, without disclosing that information to the counterparty). I think it would be cool if people offhandedly and correctly referred to 10b-5 violations rather than "insider training," but given that people even on this site don't consistently and accurately use equally specific concepts that are much more applicable to them (e.g., backdoor Roth "contributions" vs. "conversions," or whatever other variants you see), I think that's unlikely.

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Re: Is Warren Buffett skilled or lucky?
« Reply #45 on: April 05, 2014, 11:34:48 AM »
http://www.nytimes.com/2014/04/06/business/the-oracle-of-omaha-lately-looking-a-bit-ordinary.html?hp


lucky someone has done the math. Index investing. Even buffet apparently doesn't have everlasting mojo.

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Re: Is Warren Buffett skilled or lucky?
« Reply #46 on: April 07, 2014, 07:37:46 PM »
I'd say it's 10% luck, 20% skill, 15% concentrated power of will... 5 % pleasure, 50% pain and 100% reason to remember the name!


Honestly though, I do think it's a combination of luck skill and intestinal fortitude that few possess.  He has often made remarks about winning the birthday lottery by being born at the right time after the great depression, too young to be drafted for WWII and starting his investing career at the dawn of an economic boom.  Although his outcome is by no means repeatable on anything close to a a grand scale, I'm definitely fascinated by Buffet's methods and lifestyle and I've always admired his frugality, philosophy and philanthropic nature.   

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Re: Is Warren Buffett skilled or lucky?
« Reply #47 on: April 07, 2014, 08:09:38 PM »
http://www.nytimes.com/2014/04/06/business/the-oracle-of-omaha-lately-looking-a-bit-ordinary.html?hp


lucky someone has done the math. Index investing. Even buffet apparently doesn't have everlasting mojo.

+1

I was about to post something about this, he has been lagging the market lately.

Or maybe the market is wrong, and he is right?

Only time will tell.


Oh yeah, my vote is for more skill than luck. That was a long streak to be attributed to pure dumb luck.

luigi49

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Re: Is Warren Buffett skilled or lucky?
« Reply #48 on: April 07, 2014, 08:31:48 PM »
Might have been really skilled at the early part of his career.   Now not so much..

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Re: Is Warren Buffett skilled or lucky?
« Reply #49 on: April 07, 2014, 08:40:44 PM »
kyleaaa you should read http://www.tilsonfunds.com/superinvestors.pdf

"Taking on more risk in order to get higher returns is NOT skill." wow this just isn't so.

you assume buffett took on more risk to get better return.


i also find it a little sad with this train of thought "his return is so good,  it must be insider info". how cynical. sure, i am not saying you automatically assume its skill. but to think of the worst automatically it is sad.

if you can't even imagine that it being possible, how can you or anyone possibly do it? If you can't even imagine its "not with insider info" than in your world it had to be insider info.


It's absurd on its face to say that Buffett has or had no special investment skill.

Buffett made his initial money by essentially picking stocks with public information (and doing due diligence by himself - travelling to small companies across the country and meeting management, visiting factories, etc.). He didn't have a lot of money, and smashed index returns. These were the Buffett Partnership years. Incidentally, Walter Schloss basically did this minus the due diligence for decades and consistently achieved above market returns. Buffett, Schloss, and the other super-investors of Graham and Doddsville have consistently generated alpha over many market cycles across different market conditions. Lightning has struck the same group of people over and over again.

Buffett still picks stocks...but not like you and I. His investment universe is much smaller than ours. He needs to go after elephants that meaningfully move the needle at Berkshire. For those elephants, his unparalleled business connections now offer him fantastic deals and opportunities not available to most. You can't copy what Buffett is doing today (well, you can on a lesser scale if you are Tom Gayner at Markel or other Buffett-style investors at a bunch of other mini-Berkshires).

Although the market is much more efficient than it was in the '50s (no more domestic net-nets really), Buffett has said as late as the late '90s/early '00s that if he had lower assets under management today ($1 million or even $10 million) he is confident he could get 50% returns each year. And he wasn't kidding. But I doubt he'd do it the same way he did in the '50s - by looking at domestic equities. He'd look at odd securities of all sorts, such as weird kinds of illiquid debt and securities in emerging markets.

It's important to note that smashing index returns is not indicative of skill. Skill can be measured relatively accurately. Buffett's alpha is the result of factor exposure, not skill. This is easily-demonstrable with math. Taking on more risk in order to get higher returns is NOT skill.

Also note that saying he isn't skilled is NOT the same as saying he got lucky. People for some reason assume no skill = he got lucky. Not at all. The math explicitly proves he didn't get lucky.
« Last Edit: April 07, 2014, 08:50:28 PM by hyten1 »