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I wonder to what extent Warren Buffet is Warren Buffet because of how he thinks and acts (like all of these non-fiction authors selling books by using his name would have us believe), and to what extent he is the product of media selection bias. -- If you take a large enough group of people who take risky stakes that are large enough (like the world of financial asset management), then one of them is bound to be as successful as Warren Buffet, even if they all behave randomly.



Funnily enough, Buffett actually calculated this in his essay "The Super Investors of Graham and Doddsville"

Basically, advocates of the Free Market Hypotheses believed that it was impossible for anyone to deliberately, repeatedly generate alpha. The market was rational, and success was probabilistically distributed. With a large enough population, you will get Buffett level returns - therefor Buffett is a fluke.

However, Buffett calculated that there weren't enough investors for his success to be a factor of random distribution, plus there were 2 dozen others who followed a similar strategy who also consistently generate alpha


It's worth noting that Fama has since then walked back on the strong statement of the Efficient Market Hypothesis. I don't know that he ever intended to say beating the market is impossible; rather that beating the market must be impossible, under the rigorously definition of an idealized, "efficient" market.

Unfortunately a lot of proponents of the EMH (especially non-academics) have taken this concept and run with it in ways Fama didn't intend. His position would be more accurately stated as the claim that modern markets are eventually informationally efficient, for any given instance of information asymmetry.

It's a useful model that approximates markets, not an empirical claim about the world.


He definitely never said that beating the market is impossible. He said you can beat the market long term by taking on more risk, but not by market timing and stock selection. Everyone leaves out risk when talking about the EMH.


I think you mean "efficient-market hypothesis".


"The Superinvestors of Graham and Doddsville" (1984) https://scholar.google.com/scholar?cluster=17265410477248371...

From https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a... :

> The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index.


Not over the time period he has been successful. Or at least the longer he lasts as a successful person doing what he does the less likely he's just acting at random. It's possible to get 1000000 heads in a row flipping a fair coin, but around 20 I'm going to be suspicious.

edit: With Buffet, he's not actually getting everything right, so I guess a better metaphor would be like 70% heads over 1000000 flips... more likely under random circumstances, but still pretty suspicious.


> but around 20 I'm going to be suspicious.

There's a multiple-endpoints effect here. If there are 2^20 participants all doing that, one of them is going to flip 20 heads in a row. You only notice the one who did after the fact. Some participant has to be the most outlying result and that's the only one you notice.

(Not that that's necessarily the case for Buffett, but that's a general fallacy to be aware of.)


Yeah, I'd be less suspicious of 20 in a row out of a group of 1000000 flippers. But if any of them got 70% of 1000000 flips I'd be suspicious.


There is such a thing as information, knowledge, wisdom and finally free will.

Warren Buffet is Warren Buffet because of the way he consumed the information available to him, interpreted it and finally reacted to it.

Certainly, Warren does not control the many factors in the environments he found himself in, factors that was favorable for him to get to where he is today and factors that were obstacles to him. But his chosen actions are his, the paths he took, the burdens, the risks, and the responsibilities.

I would perhaps think of him as wise, not a genius or any such worship nonsense.


>There is such a thing as information, knowledge, wisdom and finally free will.

The prevailing theories of today are that "free will" isn't so real.

https://www.psychologytoday.com/us/blog/sapient-nature/20120...


Buffett shows how investors like him are not random in this lecture,

https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham...


If they all behaved purely randomly WB would be a high sigma event - he's got to be loaded in some way - the issue here is which of WB's properties are behind his financial success - one strategy would be to emulate him as accurately as possible in all his idiosyncrasies or to use a more scientific method (e.g. looking at common traits among agents of his class).


Except that he has been consistently successful over a very long period, unlike, say a Paulson who one could claim got lucky in 2008.


A thought experiment: Say I have a database with 1024 e-mail addresses. I split them in two groups. I send an e-mail to 512 of them saying "tomorrow, IBM is going to go up". To the other 512, I send an e-mail saying "tomorrow, IBM is going to go down". The next day, IBM is up, and I discard from my database the 512 people to whom I've just sent an incorrect stock tip. Then I repeat. I send an e-mail to 256 people saying "tomorrow, Microsoft is going to go up", and so forth. ...at the end of the process I have someone who I've just sent 10 correct stock tips to. -- From the point of view of that person, I have been CONSISTENTLY successful. So that doesn't really mean anything.

Also: There is a saying: You only have to get rich once. It is much easier, if you come into money at one point in your life, to hold on to it, than it is to repeatedly go from zero to hero, since capital has a tendency to create more capital, and a lack of capital has a tendency to prevent you from accumulating any.

I know it goes against the mindset of the American entrepreneurially-minded crowd here. But it's a thought.


Except Buffet has been emailing everyone every year since 1962; unless he has a way to pick branching timelines.


> unless he has a way to pick branching timelines.

Now that would be a skill that would set you up for success!


You can use the "[private] tournament winner" selection process up to a certain point, but at some point far below Warren Buffett's current level, you come into the public eye.

If it were akin to flipping coins, we'd almost surely have seen 16+ proto-Buffetts emerge into public consciousness only to see 15 of them blow up. Sure, there have been hedge fund failures and you could argue that Madoff was a public eye super-investor who turned out to fail, but I don't think there are enough examples of "this guy is a genius based on his track record" turning into "that guy we thought was a genius turned out to just be a lucky idiot" to suggest that all of Buffett's returns are luck.


Derren Brown did exactly this with horse racing:

https://www.youtube.com/watch?v=9R5OWh7luL4


While you are right, I think the parent's idea if that with a large enough sample, even if every actor is making decisions randomly, you will get actors that will just crush it.

I mean Warren Buffet invested in Apple about a year ago based on the idea that they have a sticky brand and went so far as to say that iPhones were underpriced (which is just flat out wrong given how poorly they sold relative to predictions). . .and it turned out to be a terrible investment decision (so far). While I find it hard to believe that WB is all luck I think you can't dismiss that argument entirely based on his track record, no matter how successful.


Warren Buffet would be the first to tell you that how the market prices an investment on any given day, has very little to do with the intrinsic value of that investment. Just because Apple went down relative to when he invested, that doesn't mean it was a bad investment. Markets go up and down in unpredictable ways. As they say, in the short term the market is a voting machine, in the long run it's a weighing machine.

By this time, I think it's become clear that Apple's disappointing results were entirely caused by the macroeconomic conditions in China and nothing else. Certainly not because of increases in their product prices like you speculate.


I am not an active investor. I do not claim to know as much as someone like WB. However, what you have just explained is all pretty obvious.

To buy Apple's explanation that most of their disappointing quarterly earnings were as a result of Chinese macroeconomic conditions is frankly being generous to them. Just focusing on the iPhone, it is a muddled offering where successive iterations don't stand out from the next as they did in previous generations. Now, this isn't just an Apple problem. Innovations in smartphone technology have slowed down across all handset makers. However, until Apple shows that they can successfully increase their service offering to get more money out of their users and are able to charge more for handsets then opportunities for growth seem pretty limited in that space. Moreover, when I see that apple is increasing credit on trade ins for newer iPhones a few months back. . .I take that as a sign that consumers see little value in upgrading. Not saying Apple is doomed but they don't show signs (to me) that they are on the path for growth.

My comments on the price of iphones was from misremembering WB comments about them 6 months ago. He said that the iPhone was underpriced but that Apple could not increase prices due to competition. I thought he made a statement saying he believed that prices should be increased on the iPhone range. I never claimed that their stagnant sales are from product prices, rather that worldwide sales demonstrate that the price should definitely not be higher than it is currently (unless they improve the product dramatically).


However, what you have just explained is all pretty obvious.

I was just addressing your notion that the investment was "terrible".

To buy Apple's explanation that most of their disappointing quarterly earnings were as a result of Chinese macroeconomic conditions is frankly being generous to them…

But we don't have to "buy" their explanation, because we can just look at numbers. Apple has released their quarterly results, and the iPhone grew in every region except China. Yes, growth has slowed, but this is not a new trend and is not the reason that this quarter has disappointed investors.

until Apple shows that they can successfully increase their service offering

But they have shown that! Service revenue grew by a very healthy 19% last quarter (relative to the same quarter yesteryear).

when I see that apple is increasing credit on trade ins for newer iPhones a few months back. . .I take that as a sign that consumers see little value in upgrading

Why would you look to signs, when you can look at the numbers? There is no reason to speculate when Apple has released the results.

Six Colors has a lot of pretty graphs and numbers if you're interested: https://sixcolors.com/post/2019/01/apples-dramatic-q1-2019-r...


On Apple; on a 1 year timeline APPL beats the S&P 500 by 5%. But I don't think Buffett measures his investments on a 1 year timeline; and to be honest to your comment, he made the underpriced comment on Aug 31, 6 months ago.

"I do not focus on the sales in the next quarter or the next year," he said. "I focus on the ... hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone]."

Apple does continue to boost services income, keep cash on hand, pay dividends, and do share buybacks, all with a P/E below major utility stocks -- things Buffett traditionally considers.

Disclaimer. Apple Shareholder


I misremembered his comment on iPhone prices. He just said that they are undervalued relative to their utility. I thought he made a comment that Apple should look to increase iPhone prices, which, as he admits, would be a terrible move.

Listen, I was just trying to make an argument that even WB can misjudge a situation. It was not a convincing argument because half the example I used was not correct. Timing wise, buying apple stock in early 2018 before concerns about Apple being able to grow and stoke the hunger for their consumers to upgrade is not ideal. Hindsight is not a necessarily fair way to judge his decision because as you mentioned his horizon goes far beyond a year.

Maybe my personal bias is coming through because I just don't see it as such an exciting brand anymore and I struggle to see where they will find new areas for growth. Whereas 10 years ago I was looking to upgrade my laptop/smartphone every 1-2 years, now I've got my iPhone 7 and my 2013 macbook air and I'm sticking with them until they fail because nothing that Apple offers makes me go 'I want that'.


Yeah, the example was a pretty poor one. Your quote about pricing wasn't far off from what Apple was trying to do; I heard somebody say they're realizing that the smart phone market is saturated and seeing how high they can pump the price before it matters; and you and I both think they found it.

> I just don't see it as such an exciting brand anymore

The stock market also doesn't see it as exciting anymore. The market has had this view since Steve Jobs was alive; where Apple's P/E places it below value and dividend stock (it trades at half the multiple of Duke Energy). In order for you, or Warren Buffet to think Apple is a good value investment, it only has to be ~1/2 as exciting as Microsoft or Duke Energy.


Buffet also refused to invest in computer/Internet companies for many years because he knew he didn't understand them.


Well, if you take the random-chance/selection-bias as the core of a snowball and add to it the various mechanisms which mean that the game of asset management is rigged in favour of the manager, then I think there is something to this. For example, asset managers get a part of their income from a MANAGEMENT fee which is a percentage of the assets under management, that they collect regardless of whether the fund actually does well. If you get a few bets right, make a name for yourself, more people will be putting money into your funds, and it all turns into a self-fulfilling prophecy.


I can't find the quote, but Buffett himself addresses this somewhere by saying that while you can get very lucky in finance, if the lucky ones all come from a particular city (Omaha) with a particular philosophy, something might be up.


He’s talking about value investing.

The markets are supposed to be efficient and you can’t beat them.


Indeed, they're supposed to be.


The key to me, it seems, would be to evaluate his decision making process as opposed to merely examining the outcome. If the stated rationale used at the outset is validated (repeatedly), then it stands to reason his success is due to more than simply being lucky.

I'm not very familiar with Warren Buffet or the world he operates in, but my understanding is that he does not in fact take particularly risky stakes and explicitly stays away from verticals he's not familiar with. Hence my personal opinion would be that how he "thinks and acts" has directly contributed to his success - but happy to be proven wrong.


People like him, are made by many, many random acts, and of course dedication, around 10.000 hours is need it for be an expert in any field, any. What if "grandfather who was a grocer" was a plumber instead?

I Strongly recommend this book: Outliers by Malcolm Gladwell.

He studies outliers, their family, culture, timing. One of many fun facts is that almost every pro-hockey player in Canada is born in the early's month jan, feb, mar.

Why? they compete versus small children when their are kids, and those months of strength give them advantage, which sent them into better teams, with better coaches and so on..


I wouldn't recommend any books by Malcolm Gladwell. He oversimplified things for the sake of telling stories.

If you want to learn rigorously, better look toward academic sources.


Which academic sources would you recommend on this topic?

I've checked the sources from that book and they seem legit, including papers and articles[1]. Besides, the reviews of that book are very positive [2].

[1]: http://guides.skylinecollege.edu/c.php?g=279172&p=1861295 [2]: https://www.amazon.co.uk/Outliers-Story-Success-Malcolm-Glad...


My recommendation is to read the academic sources, not the guy who simplified materials to an extent that things are lost in the translation leading to misrepresentation and misunderstanding.

Also, always read the negative reviews. Sometime, they are bunk, but they sometime can be very informative.




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