There are plenty of people who disagree about Buffet - Nassim Taleb who wrote "Fooled by Randomness" is among of those. Out of all the people who started investing in stocks in the 50s, it's not surprising that at least one of them turned out to be among the richest people in the world and kept getting it right every year.
If you have enough people throwing coins, you're going to get some people who keep getting heads over and over. Those few people who have a superior coin-tossing technique are probably not going to end up anywhere near the top - This is especially true if you believe in the rhetoric that people of high talent are "very rare".
The sheer masses acting out of randomness will always beat out the few "very talented" individuals.
In "Fooled by Randomness", the author alludes to the idea that the top people at any given time in any given field often got there through very little talent - It just happens that their approach was a good fit for their field at that particular time - As soon as some "black swan" event happens (and they always happen, eventually); these people tend to lose everything very, very quickly.
Also, the reason why Buffet gets it right most of the time these days is the same reason why George Soros gets it right most of the time; whenever either of these famous investors buys any stock, it becomes big news then all these other wealthy investors follow suit - Soon enough you have half of humanity rooting for/against that specific company/security so anything they do becomes a self-fulfilling prophecy.
>There are plenty of people who disagree about Buffet - Nassim Taleb who wrote "Fooled by Randomness" is among of those.
I can't find the source, but I believe Taleb was misquoted (or misinterpreted) on Buffet. Taleb indeed makes the general argument that most high performers are just lucky. But he doesn't say that all are. He just says: you can't tell.
As for Buffet, he complained he hadn't meant Buffet was unskilled. He meant Buffet was skilled and had luck. Which is a plausible interpretation. You likely need skill to get to Buffet's level. But those with the skill of Buffet don't all end up at Buffet's outcomes: Buffet would be at the high end of the distribution of those that had his level of skill to work with.
At least that's how I interpreted it. I believe Taleb's subsequent commentary on this was in Black Swan or Antifragile. It involved the phrase "for Baal's sake" when complaining about how people had interpreting him as saying "Buffet is pure luck".
I didn't claim that Buffet is unskilled either. He was always well qualified to do his job. But his success doesn't necessarily say much about his ability.
I don't think it's really a useful thing to think about. Are there good writers, or just qualified writers who luck into writing the right stuff at the right time? You can apply that logic to almost anything.
I'm both a fan of Taleb and Buffett. That said, Buffett's success is due to his strategy of evaluating companies based on a number of characteristics - value investing. It actually aligns very nicely with Taleb's personal investing strategy (as noted in his later book, the Black Swan) of eliminating uncertainty.
Long story short, the less you know, the more "random" events appear to be. As Taleb wrote, "a surprise for the turkey is not a surprise for the butcher." Buffett's strategy is to know/understand as much as possible. Of course you will still be victim of the unexpected, but probably not as frequently.
A nitpick: Berkshire Hathaway don't publicise any stock purchases or sales and they don't comment on them. Specifically because they don't want to give out information that will drive up the price quickly.
I imagine that's grown harder and harder as time goes on, given the ability of HFT algorithms to spot big purchases in progress. But Buffett has always preferred outright purchases or special one-off deals (eg. the Bank of America deal or individually-negotiated insurance contracts).
Warren buffet buys Goldman Sachs off-market for a 20% discount during the GFC. It's not the first time he's been given a very large return because he's warren. Comparing returns including that kind of thing to what you and I can get buying at market prices on a stock exchange is absurd.
His returns come from management giving him their shareholders wealth as much as anything and have done for some time. Someone will now claim he was righteous and a white knight saving salomon's management or saving goldman's from gfc ruin or whatever. Believe that if you like but don't compare it to those who were shut out from making that same buy at the same time and same price. I'd be surprised if in the past 20 years or so if you factored out all the off-market, warren only buys he got if his returns didn't look a lot more like the S&P500 adjusted for statistical risk using standard CAPM beta measures.
Saying so out loud will offend the hell out of a lot of people who really need to believe. But maybe someone will calmly and dispassionately do the calculations and show my suspicion to be wrong.
That coin flipping analogy is not comparable to active trading. I'm going to paste a comment I made on this topic less than a month ago: https://news.ycombinator.com/item?id=13303395
In addition to the comment pasted below, others in this thread have shown that the actual odds of someone consistently beating the market for decades becomes 1 in billions or even trillions. Yes, there are very few traders and funds that consistently beat the market, but there are enough that it seems implausible to be due to chance when you do any reasonable math. You would need nearly the entire human population trying and failing at beating the market in order to justify the number of demonstrable winners we can observe as mere chance. It's much simpler to assume that 1) market inefficiencies exist and 2) some individuals have the technical skill, domain knowledge and/or business acumen to repeatedly capitalize on them.
I don't understand why this coin flipping analogy from efficient market hypothesis keeps popping up. We can clearly see that funds like RenTec exist, and average 70% returns year over year for literally decades. It's an attractive idea, but I've never seen anyone who puts it forward do any empirical calculation. The claim is essentially, "Get enough monkeys slinging poop in a room full of typewriters and you'll eventually get Hamlet." If you want to cast doubt on the fundamental possibility of people beating the market, at least least try to claim that these successful funds/traders illegally trade on insider information. Don't use the same analogy that is basically indefensible under real scrutiny.
Comment below:
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Yes, that's the classical coin flipping example from the strong position on Fama's Efficient Market Hypothesis. There are several problems with the coin-flipping analogy:
1. As stated, it's not falsifiable. So you start with a conception of the market as entirely random, and you observe that participants are consistently beating this market. Each time you observe someone beating the market, you chalk it up to the probability distribution. "Well, that's just a two-sigma event." Then you see it happen again. "Well, that's just a three-sigma event." Then again, and again, and again. How many sigmas from the average market performance are you willing to accept before you agree that someone is legitimately and purposely beating the market with a skill-based mechanism, not a chance-based mechanism?
Furthermore, do you have the numbers to turn this into a falsifiable claim? What is your time interval? Daily, weekly, monthly or annually? How many correct forecasts do they have to make ("how many sigmas from the average"), compared to the chance expectation of coin flipping over the same timescale? If you don't have these numbers handy, then it's purely a thought experiment. Subsequently, the observation that funds like Berkshire Hathaway, Bridgewater, Renaissance Technologies, Baupost Group, Citadel, DE Shaw, etc. consistently beat the market for at least 20% net of fees over 20-30 years suggests that, per Occam's Razor, people can beat the market due to skill.
2. The analogy is not comparable to active trading. You don't need to hit 20 heads in a row to beat the market consistently, you just need to hit a p-value number of x heads correct for y coin flips greater than chance would suggest. We don't assume that basketball is a game of chance if the players can't make all their shots in a row; nor do we assume that baseball players with a 0.3 batting average aren't clearly better than the average high school dugout. If your trading interval is weekly or monthly, and you're consistently up over the market (even net of fees!) for 240 months or 360 months, it doesn't matter if every single month was a winner.
3. Have you ever read Warren Buffet's response to the EMH assertion, as postulated by Fama?[1] He outlined an excellent rebuttal in his 1984 The Superinvestors of Graham and Doddsville. Essentially, if you assume that the coin flipping analogy does map to trading, then you should expect to see a normal distribution of the winners, given that the market is inherently random and no one is achieving superior coin flips through skill. However, if you observe that the winning coin-flippers consistently hail from a small village with standard coin-flipping training, then it is more reasonable to assume that there is something unique about those particular flippers. This is what we see in reality - yes, most amateur traders fail miserably, and yes, most hedge funds underperform the market over time. But there is a relatively small concentration of extremely successful funds and traders in an uneven distribution.
4. Even Fama has walked back on Efficient Market Hypothesis, and no longer espouses the view that the market is inherently random. It is deeply complex, yes, but it is not efficient, nor entirely random. Several studies have been conducted to empirically examine EMH, and the results in favor of the hypothesis are dubious.[2][3][4] A much more charitable retelling of EMH is the weak position, which essentially states that any obvious alpha will be quickly arb'd out of real utility, but that non-obvious alpha, or alpha which is technically public but not easily accessible will retain utility until it becomes obvious. This also maps more cleanly to reality, in which trading on e.g. news reports is mostly unprofitable (everyone can get a news report at around the same time, for the same level of skill) whereas mathematically modeling pricing relationships can be extremely profitable (doing so accurately requires public, but mostly unclean data and a great deal of skill).
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1. The Superinvestors of Graham and Doddsville - http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.....
2. Investment Performance of Common Stocks in Relation to Their Price-Earning Ratios: A Test of the Efficient Market Hypothesis - http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1977.....
3. The Cross-Section of Expected Stock Returns - http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1992.....
4. International Stock Market Efficiency and Integration: A Study of 18 Nations - http://onlinelibrary.wiley.com/doi/10.1111/1468-5957.00134/a....
The dissonance is strong with this one. I have tried multitude of times to explain that trading is not throwing dice. When you throw dice, you get a final outcome. When you open a trade you get a stream of outcome (which is not 0 or 1) and you are free to select the current outcome (close a position).
In its lifetime, your position is going to swing from negative to positive to negative multiple times. Emotions and naivety makes novice traders lose money on their trades while luck make throwing dice a random event.
In my opinion, people are just afraid to admit that someone else has a bigger dick (or tits) than him(or her).
The ratios for these calculations only include participants. There are seven billion humans, the vast majority of whom are either not old enough to trade or not in regions where they can actually participate in trading (in the speculative, not investing sense). Of those even eligible to trade, most do not engage in it in any kind of intentional capacity, let alone professional.
There are not seven billion traders. At any time in the United States the number of funds is in the thousands. Adding in other countries, and being generous with the term "trader" (or "investor", "fund manager", etc), I would be willing to agree that there have been millions over the past two decades (the same time frame as some of the track records I've mentioned). What does that leave us with? We're still orders of magnitude away from the successes we observe emerging due to chance. The numbers just aren't there.
Hm...theoretically? The thing is, the broad zeitgeist of extremely profitable strategies changes over time. James Simons and Warren Buffett might as well be in different fields for how different their day to day work and peripheral market behavior were during their careers. That might be confounding, because on a long enough timeline all job functions become obsolete and have to change.
Other than that though, sure. Unfortunately it would be really difficult to examine empirically, which is why I use a 20-30 year slice of time.
If you consider that there is a chance a flip will give you another hundred flips for free... And that can compound. It probably isn't as unlikely as you think.
There is a good Euler problem on investing showing that odds based investing can be relatively easy. Of course, many things including granularity of bets, floors, ceilings, and fees complicate matters considerably.
But, a relatively few big wins can give you a lot of slack.
"showing that odds based investing can be relatively easy"
It depends on what you mean by easy. To maximize the probability of going from $1 -> $1B in 1000 flips, you need to bet almost everything you have every time (the answer to the problem is > 0.99999).
If you do so, you must win at least 917 of the coin flips to get more than $1B. I can't compute the probability of this event, but using the normal approximation to the binomial distribution, the probability of winning at least 615 coin flips is less than 1 in a trillion (10e-12). You can imagine how much lower it is if you need 917 flips.
This is under the favorable betting scenario where you get 2x the value of your bet every time you win.
EDIT: Ignore everything above. Clearly I solved this a while ago and forgot to check what the actual question was. The probability that you become a billionaire is > 0.99999, the optimal fraction is quite small, of course.
Things change drastically if you get the value of your bet when winning instead of 2x (it seems you need 602 coin flips in that case which is about 0.07 in a billion).
That isn't what that answer means, is it? Rather, that is your odds of becoming a billionaire. Which is basically certainly.
Now, yes, that is greatly simplified and lets you always divide your current wealth. And always double. That is what I meant about floors and ceilings.
I recall playing with the code to toy with more realistic situations. Washing fees out of the game makes it a lot easier to not lose everything.
By no means guaranteed. But easier. And it is likely someone could have done really well by the odds.
Edit: Just saw your edit. Yeah, it was easy to think it was asking the other question. And yes, realistic scenarios are vastly different. Otherwise, a lot of us would be billionaires. :). Just pointing out that the odds aren't nil. Just small. And don't forget, in real scenarios you can change games once you have won enough.
If you have enough people throwing coins, you're going to get some people who keep getting heads over and over. Those few people who have a superior coin-tossing technique are probably not going to end up anywhere near the top - This is especially true if you believe in the rhetoric that people of high talent are "very rare".
The sheer masses acting out of randomness will always beat out the few "very talented" individuals.
In "Fooled by Randomness", the author alludes to the idea that the top people at any given time in any given field often got there through very little talent - It just happens that their approach was a good fit for their field at that particular time - As soon as some "black swan" event happens (and they always happen, eventually); these people tend to lose everything very, very quickly.
Also, the reason why Buffet gets it right most of the time these days is the same reason why George Soros gets it right most of the time; whenever either of these famous investors buys any stock, it becomes big news then all these other wealthy investors follow suit - Soon enough you have half of humanity rooting for/against that specific company/security so anything they do becomes a self-fulfilling prophecy.