
The Dumbest Thing I've Heard Warren Buffet Say - epi0Bauqu
http://www.gabrielweinberg.com/blog/2008/05/the-dumbest-thing-ive-heard-warren-buffet-say.html
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nradov
I think I know what Warren Buffet was trying to say. There has been an equity
premium in the capital markets for a long, long time. Stocks have tended to
return more than most other asset classes even after adjusting for risk. That
equity premium remained in place for so long because most investors didn't
even realize that it was there; essentially they thought that stocks would be
more risky than they really turned out to be.

Now that the equity premium is more widely recognized and understood, traders
have mostly arbitraged it away. So if present trends continue for the next 92
years then stocks may not return much more than bonds, real estate,
commodities, etc. (At least not after you adjust for the actual risk.)

<http://en.wikipedia.org/wiki/Equity_premium_puzzle>

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jdroid
I work in finance. This is well put. :)

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bkmrkr
hey, can you email me?

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jdroid
I need your email address...

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byrneseyeview
I had exactly the same reaction when I got to that part of the letter. I think
you can take any trend and extrapolate it into incredulity -- Buffett's career
is certainly evidence of this.

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kingkongrevenge
This "1900 to 2000" trend people are extrapolating from is a myth. Stocks, as
a broad category, have historically not been a great investment. Almost all
the gain in that period happened in the last 20 years. If you break equity
returns down into all possible 40 year periods returns were lousy.

This is taking the index numbers at face value. Better assessments of returns
using good inflation numbers and incorporating tax liabilities make the
picture much worse. <http://www.itulip.com/realdow.htm>

Finally, the real sample size goes back much farther than 1900. We have good
equity price data back into the 18th century. 80% market crashes were common.
Overall returns were not good.

Stocks were cheap in 1980. Then they soared in price for 20 years. Now people
are slow to realize that period was exceptional. Investing is about "buy low,
sell high" not "stick your money in stocks." Stocks are high. The smart money
bought commodities in the early 70s, changed to bonds in the early 80s,
changed to stocks in the early 90s, and changed back to commodities in the
early 2000s. That smart investor has absolutely crushed an equity fixated
investor. This isn't rocket science, either. It's not that hard to review
asset classes once a decade and figure out what's very cheap and what's
expensive.

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epi0Bauqu
So then what do you think the _smart investor_ should put their money in now?

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suboptimal
I don't know what an investor should do--I just watch the money move. Money
will always flow somewhere, because it has to.

Where will it flow next? Probably wherever it isn't this time.

Right now commodities (a.k.a. "stuff") is getting the attention, as some have
predicted for years (someone's always predicting something for years, until it
comes true).

Recently: Tech -> Housing -> Stuff -> ?

A problem for people with money to worry about. ;)

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rksprst
Looking at this thread, I think it would be very useful to link comments on
news.yc to disqus (so they show up on the blog post). I'm sure the disqus guys
can do that.

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webwright
So, on a related note... Google has grown really fast over 5 or so years. Say,
12,385% for the sake of argument. What do you think the chances of this
experiencing that PERCENTAGE growth over the next 5 years?

I think his point is-- high percentage growth is easy for small things. It
gets harder for big things. Growth curves tend to flatten out.

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Xichekolas
Growth curves for _a single company_ flatten out because a single company can
never be larger than the entire market (and in practice never even close to
that large). If Google were to grow indefinitely it will eventually become
100% of the economy, swallowing all other companies and employing everyone,
but even at that point it would still grow, but only at the rate the entire
economy grows.

Growth for _the entire economy_ is only limited by our abilities to innovate
and find resources (both material and human resources). There is no inherent
ceiling. The ceiling on a single company (which makes it's growth rate fall
off) is imposed when it saturates it's market and can't enter any new markets,
the economy as a whole is fueled by the seemingly endless wants of humanity.
In essence, there is always a new market for the economy to enter: the next
human desire.

In short, the only way there could be a ceiling on the entire economy is if
humans stopped wanting new things. Economic growth is supply constrained
(supply of resources and innovation), not demand constrained.

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ovi256
>... find resources (both material and human resources). There is no inherent
ceiling.

Well, you just stated your ceiling. Material and human resources are both
finite. Positive thinking cannot just make that go away.

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Xichekolas
I guess I should have clarified that I meant there was no inherent ceiling on
the _size_ of the economy (other than the amount of mass and energy in the
known Universe, although I hope we'll figure out something else to do before
we consume all that), but yes, the growth rate in any given year is limited by
resources available and human innovation. Sorry for the ambiguity.

I guess my point is that the reason high percentage growth is easy for small
companies is because they can rapidly expand to fill an existing market that
is much bigger than the company. The reason it is hard for big companies is
because of market saturation.

The economy as a whole doesn't work that way. It just relentlessly grows with
our ability to acquire resources and never-ending human desires.

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etal
The point wasn't that 2 million is a huge number, but that 5.3% is just as
huge. The millions are the eye-catching part, but this looks like an odd way
of saying a risk-adjusted 5% return is insane, and 10% (the target for a
'90s-era portfolio) is not twice but ten times as insane, in the long run.

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hobbs
Who says you have to invest in Dow Jones' market during the 21st century? I'm
sure it wouldn't be hard to get a 5.3% return in a more emerging market like,
say, India or China.

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epi0Bauqu
An investor who wants the most return with the lowest risk will have a
balanced portfolio across many asset classes, which would include both the Dow
stocks and India and China in some fashion. That being said, the Dow companies
already get a significant % of their earnings abroad. And this % is
increasing.

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hobbs
Don't get me wrong, I completely agree with the original author. Warren's
logic is circular and seems to be preying on people's inability to conceive of
very large numbers. I'd fully expect DJIA to continue growing at roughly the
same pace this century as the last.

Even if it doesn't, though, everyone knows that the trick to successful
investment is to buy low and sell high. There are still plenty of
opportunities to buy low - even with limited risk - in large emerging
economies. The U.S. may become a low-risk capital preservation stock and China
will become the higher-risk investment stock.

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mynameishere
It could easily happen, but only if things get very, very bad.
<http://mises.org/story/2532>

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bkmrkr
Einstein did say compound interest is the 8th wonder of the world.

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admoin
I think there are two sides to what Warren Buffett is saying. One side is
nonsense, I agree - that he can make a prediction like that based on early
trends. The other side, however, which is what I think he actually meant, is
that, in fact, predicting from trends is not nearly what it's cracked up to
be, and that there is no real guarantee of continued healthy returns from US
equities, or even long-term returns to capital that are comparable to the low
double-digit returns of the 20th Century. That's a legitimate point.

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wanorris
It is utterly reasonable to argue that past returns are no guarantee of future
returns, but if that is the argument he meant to make, he did it exceedingly
poorly.

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admoin
I think he was trying to spin it in a folksy way, but ended up dumbing it down
to the point that it came across as a weak argument.

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bridgetroll
Vizzini: BRK.A at $133,000 a share, Inconceivable!

Inigo Montoya: You keep using that word. I do not think it means, what you
think it means.

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andreyf
Could it be that he's fibbing, knowing that his words will affect the market
in some way or another?

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t0pj
"Beware the glib helper who fills your head with fantasies while he fills his
pockets with fees."

Timeless WB wisdom.

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nazgulnarsil
everyone says dumb things. warren buffet says less dumb things than the
average person by several orders of magnitude.

I'm willing to forgive him the occasional brain fart.

