The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: sthubbar on April 03, 2014, 08:11:14 PM
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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?
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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.
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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
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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.
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Whatever Warren Buffet was, what he is now is Warren Buffet. He is not playing by the same rules as other investors anymore.
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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?
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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.
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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.
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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.
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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.
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If he didn't have them , he sure learned them. To say he is lucky is moronic.
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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.
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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.
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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?
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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
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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.
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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.
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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.
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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.
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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!!
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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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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. ;)
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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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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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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.
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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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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.
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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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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.
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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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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.
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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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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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Buffett is a mathematical savant, somewhat socially inept, and quite OCD. Gotta luv him ....
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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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Looks like some of you have your mind completely made up from the beginning.
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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.
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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.
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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
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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.
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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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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?
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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. "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
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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.
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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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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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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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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.
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Might have been really skilled at the early part of his career. Now not so much..
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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.
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This thread is very telling.
It's very easy to simply parrot Boglehead standard doctrine and apply it meaninglessly. I think Boglehead received wisdom is generally correct and based on fairly rigorous data, but to then go out and call Warren Buffett completely unskilled and just lucky is beyond ridiculous.
This just goes to show that the reader should be wary when taking advice from many on this forum. There are many on here who give great free advice, but there are also a lot of people who are 100% sure on things they are almost completely uninformed about. That is the most dangerous combination of person to take advice from.
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This is also a matter of theory of mind, as in how your particular model of the world works and thus how you are perceiving and processing of the "raw data" you get from the world is interpreted.
For some, seeing a person throwing 10 consecutive times a 6 with a dice, it cant just be luck - it has to be truly skill as the chance to do this just by luck is so damn small.
For others, it would be suspicious there would not be someone to achieve this given 10.000.000 people trying - as the chance for this is truly small.
Also, you can't prove that a strategy is right by its outcome.
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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
This is a straw man argument IMHO.
There are people (Professors / Grad Students, etc.) who examine returns, and form theories about price movements, and risk, while completely ignoring basic business analysis. All the ratios and terms come from the price movements only: "Why is one company riskier than another company... because its daily price moves up and down a bit more."
You (or the linked paper) define "skill" within that space only.
That is silly and a straw man argument as mentioned.
I believe that Mr. Buffet is very skilled in analyzing businesses -- among other things.
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This thread is very telling.
It's very easy to simply parrot Boglehead standard doctrine and apply it meaninglessly. I think Boglehead received wisdom is generally correct and based on fairly rigorous data, but to then go out and call Warren Buffett completely unskilled and just lucky is beyond ridiculous.
This just goes to show that the reader should be wary when taking advice from many on this forum. There are many on here who give great free advice, but there are also a lot of people who are 100% sure on things they are almost completely uninformed about. That is the most dangerous combination of person to take advice from.
Excellent comment.
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I think most any multi-billionaire who did not inherit their fortune is mostly skilled. Buffett saw opportunities and took them. So did Bill Gates.
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I think most any multi-billionaire who did not inherit their fortune is mostly skilled. Buffett saw opportunities and took them. So did Bill Gates.
Of course they did, and successfully so.
But the big question is: what determined that success?
Basicly they made bets on the future (Gates with his programming stuff hit a nerve, but at the time he made his bets he could not possibly be sure it would work out making him rich) and won those bets.
There are countless other business founders who also made bets and have loosed. Also there are countless other traders who bet on certain strategys and loosed. Buffet bet on a strategy that has won in the past. Could he know he will be a big winner when making his business decisions?
What if buy-and-hold turns out to be a loosing game in the future? Everyone betting on this currently would not meet their financial goals down the road and join the loosers crowd. Some other guys would become very rich by following a different strategy. There would be people arguing that they were extraordinary skilled because the saw the opportunitys and took the risks (and won their bets).
It all boils down to this saying: "It is difficult to make predictions, particularly about the future."
Strategy is always something looking forward in the future where skill is always looked at in retrospect.
There is some fallacy i dont know the name of that very good describes whats going on in this thread: It is about people always reasoning success with skill but loosing with external factors.
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Simply "buy and hold" does NOT accurately summarize the totality of Buffett's strategy, especially now. Buffett started off as a classic value investor, grew beyond that with the creation of Berkshire Hathaway as an insurance and industrial conglomerate, and has often opportunistically done things far beyond simply "buy and hold." He's even done silver trading, when it made sense!
A much better summary of Buffett would be someone who has melded investing and the evaluation and management of whole businesses. He always looks at investments like businesses and businesses as investments. Sounds simple, but it is really quite divorced from how many in finance have looked at it throughout the years.
In regards to your specific claim, I do NOT think Buffett has good process because he is "successful" by some metrics. I don't idolize people based on their net worth. I think Buffett is the culmination of value investing and American business, and I think he is one of many to learn from in terms of their successful models.
I believe that you and others in this thread are sort of doing the opposite fallacy out of contrarianism - that just because someone is successful, that means he must NOT be special but that luck is a better explanation. Since you are posting on this forum, why don't you apply the same logic to MMM? He was just some guy who got lucky, right? Of course, it is obvious that he had a process which led to his current outcome. Anyone who has seriously studied Buffett would come to the same conclusion. It is only those with Wikipedia (at best) level understanding of Buffett who say that his success is solely due to luck.
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Simply "buy and hold" does NOT accurately summarize the totality of Buffett's strategy [...]
Sorry if i made the impression that i wanted to say this, it is however not the case if you read carefuly. I did not say what you understood. I used the "B&H"-strategy example just because my impression is that the majority in this community follows this strategy overall. It was not my intention to link that to buffet as i know he did far more than B&H.
The choosen particular strategy does not matter for what i tried to lay out above.
My claim is, that a strategy (even an indefinitely complex one) must always be choosen and adapted with data from the past and present, yet it points to a not-yet-known possible future. With a given strategy you try to exploit a particular future that will emerge without knowing how it will turn out when choosing your strategy. If you do this well, you try to strenghten your strategy to succeed in as many possible-futures as possible which does increase your overall success rate. But the success rate can only be determined afterwards (when the future becomes the past and one particular future of all those many-many-many possible ones becomes reality).
Since you are posting on this forum, why don't you apply the same logic to MMM? He was just some guy who got lucky, right?
I apply this logic to him too, as well as me and it holds true so far. Everything MMM did was in perspective to an unknown future. If the russians would pose nuclear WWIII upon us and the world comes to an end even MMMs life would change drastically, possibly to a point in which we would not see it as success.
Take me for example: I prepare my life- financial strategy to be able to bear a wide range of possible "futures". Yet i do not know which one will become reality. My success rate (meaning retirement before 60) has a high probability of success - but there are possible futures where i will never be able to retire (the one where i get divorced in two years and loose my job and never get another one, for example).
I depend on the overall world conditions (which i think will be awesome, btw) for my life to turn out good, like everyone else. Also Buffet would have not been able to become what he is now if markets werent in his favor. The particular market that we have seen the last 100 years where purely luck. BTW by "luck" i mean not "gamble in the casino". It is a question of probability that you can find everywhere where systems (even deterministic ones) are complex and unpredictable.
Imagine the one fictional history where Buffet invested in silver "because it made sense" but against all odds he lose the bet and also some other assets crashed badly. Would you say, he was 100% sure that what he did was riskless? Certainly no, because if that would have been the case, we would have a magnitude more Buffets by now (or more likely the deal would not yield very much).
It was Buffets "luck" that none of his major risks (he was not able to cover) ever turned out to bite him in the back. This was luck and not buffets skill. His skill maybe lies in the fact that he maximized his success rate quite good.
If i think about it, i think we have a different definiton of "luck" and its outcomes.
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Well, you only get paid for risk. You don't get paid for safety.
This is why you make more in the stock market than you do in the bond market and why you make more in junk bonds than you do in government bonds.
But even government bonds have some tiny risk (government stability, inflation risk).
So yes, in a small way Buffett was lucky because the risks he took, while low, did pay off quite well. He was mostly skilled though to mitigate those risks.
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He was mostly skilled though to mitigate those risks.
Yes, of course. But he was lucky that the rare risks did not materialize in this our reality which of course also would have been not the case. Here we are back at the law of the big numbers. Risks thend to unforeseen realize themselfes from time to time (otherwise they would not be risks). Some of those realizations would have Buffet disallowed to become wealthy. It was not in buffets might to prevent such events, it was purely luck (for example that the cold war did not escalate into nuclear meltdown).
Sorry, i reach my cognitive and language skill borders to better explain what i want to say. I was not lucky enough to be born a high intellectual individual with english as mother language.
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Simply "buy and hold" does NOT accurately summarize the totality of Buffett's strategy [...]
Sorry if i made the impression that i wanted to say this, it is however not the case if you read carefuly. I did not say what you understood. I used the "B&H"-strategy example just because my impression is that the majority in this community follows this strategy overall. It was not my intention to link that to buffet as i know he did far more than B&H.
The choosen particular strategy does not matter for what i tried to lay out above.
My claim is, that a strategy (even an indefinitely complex one) must always be choosen and adapted with data from the past and present, yet it points to a not-yet-known possible future. With a given strategy you try to exploit a particular future that will emerge without knowing how it will turn out when choosing your strategy. If you do this well, you try to strenghten your strategy to succeed in as many possible-futures as possible which does increase your overall success rate. But the success rate can only be determined afterwards (when the future becomes the past and one particular future of all those many-many-many possible ones becomes reality).
Since you are posting on this forum, why don't you apply the same logic to MMM? He was just some guy who got lucky, right?
I apply this logic to him too, as well as me and it holds true so far. Everything MMM did was in perspective to an unknown future. If the russians would pose nuclear WWIII upon us and the world comes to an end even MMMs life would change drastically, possibly to a point in which we would not see it as success.
Take me for example: I prepare my life- financial strategy to be able to bear a wide range of possible "futures". Yet i do not know which one will become reality. My success rate (meaning retirement before 60) has a high probability of success - but there are possible futures where i will never be able to retire (the one where i get divorced in two years and loose my job and never get another one, for example).
I depend on the overall world conditions (which i think will be awesome, btw) for my life to turn out good, like everyone else. Also Buffet would have not been able to become what he is now if markets werent in his favor. The particular market that we have seen the last 100 years where purely luck. BTW by "luck" i mean not "gamble in the casino". It is a question of probability that you can find everywhere where systems (even deterministic ones) are complex and unpredictable.
Imagine the one fictional history where Buffet invested in silver "because it made sense" but against all odds he lose the bet and also some other assets crashed badly. Would you say, he was 100% sure that what he did was riskless? Certainly no, because if that would have been the case, we would have a magnitude more Buffets by now (or more likely the deal would not yield very much).
It was Buffets "luck" that none of his major risks (he was not able to cover) ever turned out to bite him in the back. This was luck and not buffets skill. His skill maybe lies in the fact that he maximized his success rate quite good.
If i think about it, i think we have a different definiton of "luck" and its outcomes.
Good post. I totally get what you are saying. Everything in life is in fact probabilistic. But the skill in life comes in knowing which risks are worth it and which aren't. MMM talks about this when he mentions why he doesn't wear a helmet.
Broadly, I do think we all run a Risk of Ruin. Cancer or some other serious disease could wipe even the most well-capitalized of us out in the blink of an eye.
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Warren Buffett is like, 80 something years old. He spent most of those years running a business, which, even if its success is mostly due to others, should have taught him quite a bit. Since most of that business is investing in solid companies it certainly helps to have 60+ years to watch the interest compound.
Regardless, check out his Berkshire Hatheway reports: http://www.berkshirehathaway.com/reports.html
He his refreshingly candid about his business, it's success and when he occasionally screws the pooch and loses money - sometimes a lot of money.
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It is true that the future is unknowable and anything can happen. However, most good Traders know that you can make money without knowing what's going to happen. Luck plays a part but it is not the only part.
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100% skilled and wise and he did it all without investing in 401ks, IRAs, and Index funds, what a shocker!!!
Buying high quality companies when they are very low, or working out deals to buy them undervalued. Then he held them for awhile and sold at new record highs for the company. Like his latest deal with Netflix. His team suggested he buy at $63/share, and then sold around $432/share after a year, of course, to reduce the capital gains tax.
He donates shares of his own company (that at the beginning was worthless by the way.) now to charitable funds for a charitable deduction (up to 50% of his adjusted gross income).
$60 Billion at 4% minimum earnings for dividend growth is $1.92 Billion a year (-20% div taxes), let alone any capital gains he has chosen to take.
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I recommend reading The Myth of the Rational Market. It discusses the history of the efficient market hypothesis and all the guys that were a part of it. Many believe the markets are rational and efficient however the guys who made the theory and have the Nobel prizes because of it actually came to a compromise with the behavior economics guys years ago that markets are mostly efficient and there are times they aren't. Those times that they aren't are enough for someone that is good to exploit.
This shouldn't be a surprise to anyone. How many people do you know make bad decisions? It's probably most people that you know. Just walk through Wal-Mart if you can't think of anyone. These folks make dumb decisions all the time and they do the same thing in financial markets. They are irrational people and somehow if we get all these people together we suddenly have a rational market? Hogwash.
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He plays by literally the exact same rules.
Not at all. At this point, news that he's invested in something causes an immediate investor reaction which drives the price up. When he invested in Bank of America, for instance, the price spiked 25% when the news broke. It's almost a self-fulfilling prophecy now.
Additionally, Berkshire Hathaway owns enough of many companies that it can affect their management and business decisions. Berkshire has the potential to improve and alter the course of these companies, something the average investor cannot.
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He plays by literally the exact same rules.
Not at all. At this point, news that he's invested in something causes an immediate investor reaction which drives the price up. When he invested in Bank of America, for instance, the price spiked 25% when the news broke. It's almost a self-fulfilling prophecy now.
Additionally, Berkshire Hathaway owns enough of many companies that it can affect their management and business decisions. Berkshire has the potential to improve and alter the course of these companies, something the average investor cannot.
No doubt. And who do you know that has a bat phone to the White House and Fed? Does GS call anyone in here with an investing opportunity at unbelievable terms? He's not on a level playing field now, for sure. However, there was a time when he was just like you and me and did pretty well for himself then too.
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And WB has said that if he were to start all over again today, he'd do basically the same thing he did then. Most small listed companies have zero analyst coverage, so if you do the ground-work (that's what he did - driving around the country and going to warehouses and kicking tires, etc.) you can actually have a real edge.
Takes a lot of work though, and it's harder than it was then. No more "net-nets."
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I'd say 80% skill at least. But there clearly is some luck involved especially in the early days he made some early bets in strange commodities which could have gone south. These are all well documented in the very excellent biography The Snowball Buffett may just happen to be the best, but I think as he talks about in this speech The Superinvestors of Graham-and-Doddsvile
http://www.tilsonfunds.com/superinvestors.html (http://www.tilsonfunds.com/superinvestors.html) value investors out perform the market. I think if you give Warren Buffett, or any of the guys he discusses, a chance to start over with $1 million and 100K salary (like Warren gets) in Jan 1, 2009 they would have all crushed the market by today. I bet most would be worth $5 million today.
There would have been no hesitation in recognizing that market was severely oversold by any of the guys and they probably would have applied leverage margin loans or options to increase their returns. Contrary to the efficient market hypothesis there are always securities which are mispriced and at times the market's manic depressive nature is evident and virtually every stock is either too cheap or too expensive. It takes a modest amount of skill and particular type of temperament to recognize these opportunities.
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Simply "buy and hold" does NOT accurately summarize the totality of Buffett's strategy [...]
Sorry if i made the impression that i wanted to say this, it is however not the case if you read carefuly. I did not say what you understood. I used the "B&H"-strategy example just because my impression is that the majority in this community follows this strategy overall. It was not my intention to link that to buffet as i know he did far more than B&H.
The choosen particular strategy does not matter for what i tried to lay out above.
My claim is, that a strategy (even an indefinitely complex one) must always be choosen and adapted with data from the past and present, yet it points to a not-yet-known possible future. With a given strategy you try to exploit a particular future that will emerge without knowing how it will turn out when choosing your strategy. If you do this well, you try to strenghten your strategy to succeed in as many possible-futures as possible which does increase your overall success rate. But the success rate can only be determined afterwards (when the future becomes the past and one particular future of all those many-many-many possible ones becomes reality).
Since you are posting on this forum, why don't you apply the same logic to MMM? He was just some guy who got lucky, right?
I apply this logic to him too, as well as me and it holds true so far. Everything MMM did was in perspective to an unknown future. If the russians would pose nuclear WWIII upon us and the world comes to an end even MMMs life would change drastically, possibly to a point in which we would not see it as success.
Take me for example: I prepare my life- financial strategy to be able to bear a wide range of possible "futures". Yet i do not know which one will become reality. My success rate (meaning retirement before 60) has a high probability of success - but there are possible futures where i will never be able to retire (the one where i get divorced in two years and loose my job and never get another one, for example).
I depend on the overall world conditions (which i think will be awesome, btw) for my life to turn out good, like everyone else. Also Buffet would have not been able to become what he is now if markets werent in his favor. The particular market that we have seen the last 100 years where purely luck. BTW by "luck" i mean not "gamble in the casino". It is a question of probability that you can find everywhere where systems (even deterministic ones) are complex and unpredictable.
Imagine the one fictional history where Buffet invested in silver "because it made sense" but against all odds he lose the bet and also some other assets crashed badly. Would you say, he was 100% sure that what he did was riskless? Certainly no, because if that would have been the case, we would have a magnitude more Buffets by now (or more likely the deal would not yield very much).
It was Buffets "luck" that none of his major risks (he was not able to cover) ever turned out to bite him in the back. This was luck and not buffets skill. His skill maybe lies in the fact that he maximized his success rate quite good.
If i think about it, i think we have a different definiton of "luck" and its outcomes.
I understand what you are saying, but there is no value in it. The idea that any success I have should be attributed to luck because Russia hasn't instituted a nuclear WWIII is ridiculous. To say that Warren Buffet is only successful because he is lucky that this planet created a life-supporting ecosystem or that he is lucky his dad happened to run into his mom when leaving a bar one night is useless. You are implying that if market conditions had been different over the last 48 years that Buffett would have been less successful. There is absolutely no evidence of that. Market conditions changed drastically over his investing career and he adapted to it in a very successful manner. Adapting to changes seems to be more skill-based than luck-based, in my opinion.
Additionally, I have no idea what you are trying to say about strategy. It seems you deem the success of a strategy as luck because you don't know the future. Strategies are designed to remove luck from outcomes, and the most successful strategies are malleable. When playing chess, at a high level, each player has a strategy. You would not say that the outcome of every game is luck because you don't know how your strategy will pan out would you?
As for not being able to predict the future, that is not true either. At least not in the sense that you represent it. Determining the current value of a company and their growth potential and deciding to invest is not the work of a fortune-teller. It is a very focused field with applicable algorithms and patterns. I can predict the landing spot of a thrown ball given a few pieces of information at the time it is thrown and Warren Buffett can predict the success of a business over a period of time given a few pieces of information at the time he is deciding to purchase it. Neither one of us must rely on voodoo to be successful. The future is not unknowable if you apply constraints to your focus. I cannot predict that a child named "Henry" will be born at any particular hospital on any particular day, but I can easily predict that a child will be born at a hospital today. Additionally, if given the current birth rate and death rate in America, I can predict if our population will grow, shrink, or maintain its current level. I cannot accurately predict the exact number of people on any given day, but I can easily predict the overall trend. Buffet never had to determine the exact dollar amount of a particular investment in a given timeframe, only if it would grow, shrink, or stay steady. That seems like a skill.
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I agree that projecting earnings and 'moat' into the future is a skill. However, Buffett and everyone else are wrong at times. Sometimes successful investors/traders are wrong more than 50% of the time yet they still make good returns. A skill that all the good ones have is the ability to ADMIT they are wrong, cut their losses and move on to something else. You can see this a lot with Soros. He can go on CNBC and spout all kinds of BS as to why the Euro is going to crash, and yet a week later he says not only was he wrong, but that he's even been buying the Euro the past few days. This ability to admit defeat and cut losses is not a normal part of human nature. All of us humans have cognitive biases that keep us from making good investing decisions. The good investors are those that have overcome their human nature and have a different mindset from the general public. This is why their performance is not a fluke/luck but one of skill. Of course luck plays a part, sometimes a big part. Buffett and Soros had no idea some of their trades would be as big as they were, however something told them to buy. Skill got them into the trade, but luck allowed the trade to go bigger and farther than they ever imagined. It's really no different than poker. A good poker player only knows the odds that his hand is best. Any card not showing has the chance of falling on the table, but if he plays the odds, over time, he should come out ahead. Some nights the cards don't fall in his favor. Some nights they do. Over time, the player with the most skill usually ends up with all the money. Good investors apply the same logic. They see a stock that, historically, has a pattern of doing one thing over another in the future. They base this on past information. They look at the odds, place their bet, and let fate/luck/the market, decide if it turns out to be a winner or not. If it's a winner, let that baby run. If it's a loser, cut it fast.
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I'll give you another example of Warren's skill. His 2009 purchase of BNSF railroad.
Warren has been following the the number of railroad car loading (Alan Greenspan also followed it) for most of his life. It's one way of measuring economic activity. (I tried following it for a while but frankly couldn't make head or tails of it.) He has long been interested railroads but never bought one. Strategically buying railroads makes sense lots of trade with China is going to be happening in the next 20 plus years and railroads are very cost and energy efficient way of moving resource and goods to west coast port. Berkshire business throw off a lot of cash and expanding a railroad is very capital intensive
Even at the time 2009 looked like a good time to buy stocks, (and in hindsight it was brilliant time.) so buying railroad was not necessarily a stroke of genius. But there are 11 Class 1(big) railroads in the US/Canada so why BSNF? Union Pacific was just as big , Norfolk Southern was more efficient. Well it turns out that BNSF lines run right through the heart of the oil shale country in the Dakota.
So here you have a huge valuable commodity with no cost effective way of getting it to market. Of course the most cost efficient way of transporting the oil, would be a pipeline, but Mr Buffett has good relationship with President Obama. I think he is too ethical to lobby the president, but he probably had a good idea that no pipeline was going to be built during the Obama time in office.
At the time of the purchase lots of commentary was made about the purchase of BNSF, with lots of people thinking that "well he probably overpaid in the short run, but in the long run it will probably work out." Fast forward 5 years and BNSF shipment of oil has has exploded, and they'll have a virtually monopoly on oil shipments for at least 5 years and probably 10 year.
Yet in all the commentary I read about the purchase back in 2009, practically nobody mentioned the growth of shale oil shipping as being a huge profit opportunity.
Now I suppose it is possible was just a happy coincidence, that Warren bought the railroad best positioned to take advantage of shale oil,at a time right before shale oil production really took off.
But after I while Warren's has had enough lucky coincidences in his life that you have to believe that he made the vast majority of his luck.
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You think more highly of him than I do. I think of Buffett as a shark, very similar to the guys you see on the Shark Tank show. He smiles on camera and sips his cherry Coke, while he stomps on your throat and squeezes every last nickel out of you in the boardroom. His businesses took plenty of TARP money back in the day, and I'm sure he had no problem with that whatsoever. He was bailed out just as much as anyone else on Wall St. Heck, he gets to withhold the stocks he's buying for a period of time so that he can build his position. NOBODY ELSE gets to do that! He's a shrewd investor that takes every advantage he can possibly get. This is not to take away all that he's accomplished, but I think people have this depiction of him based on the media that is not entirely correct.
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You think more highly of him than I do. I think of Buffett as a shark, very similar to the guys you see on the Shark Tank show. He smiles on camera and sips his cherry Coke, while he stomps on your throat and squeezes every last nickel out of you in the boardroom. His businesses took plenty of TARP money back in the day, and I'm sure he had no problem with that whatsoever. He was bailed out just as much as anyone else on Wall St. Heck, he gets to withhold the stocks he's buying for a period of time so that he can build his position. NOBODY ELSE gets to do that! He's a shrewd investor that takes every advantage he can possibly get. This is not to take away all that he's accomplished, but I think people have this depiction of him based on the media that is not entirely correct.
I agree he is a tough negotiator Shareholders of one the business he acquired (Clayton Homes IIRC) sued basically on the grounds that if Buffett bought a business he had to be getting a bargain, so management should have held out for more. :-)
But I am almost positive you are wrong no Berkshire Hathaway business received TARP funds. (Plus who cares TARP actually made money for the government, unlike say the investment in GM, AIG, or any of the countless solar energy companies)
You are also wrong about nobody else getting to withhold information about stock purchases. How many times have you had to file information with the SEC when you bought stock? I bet is precisely that same number of time I've had to make a filing ZERO. SEC rules require big investors like Buffett to disclose when the own more than 5% of a stock, but they have a process to request a waiver. According to the NY Times about 60 requests are received each quarter a fair number are granted.
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Sorry, I was referring to businesses that Buffett was invested in received TARP money. I don't know if any of his 100% owned businesses received some. His GS investment comes to mind.
Yes, I was referring to the 5% rule. Buffett gets that all the time while other hedge fund managers don't. I don't know the statistics of the approvals vs declines however.