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buffett may just be lucky?


hyten1
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In the article, he claims the evidence for Soros success being skill is more solid. He doesn't explain his reasoning in the CNBC snippet however so there is no way to understand what he means. My impression is that he comes from a trading background, especially trading options, so I'm not sure that sort of background can tell you anything about whether somebody is a good "business" picker as opposed to a good "trader". After all Soros was more a trader, even a macro-one, than a business investor.

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Although I disagree with Taleb, I actually think that his philosophies line up fairly well with Buffett's and Graham's. Taleb is certainly full of himself, but I think his comments on Buffett are from a lack of understanding of what Buffett does and how he invests. Due to his background, he understands/comprehends the investing style of Soros much better vs. true value investing (and other principles Graham discussed in his books).

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Taleb and Soros have a mutual intellectual inheritance, both being Popperians.

 

Also, the superinvestors story does not provide rigid evidence of Buffett and other value investors non-luck, merely circumstantial ones (which may or may not be subject to different biases). For Taleb that makes all the difference in the world. Although, I still believe that if he were to GUESS he would rather guess that Buffett was not only lucky. I wouldn't draw too many conclusions from this. The only thing he says is that Buffett has made far fewer bets than Soros and that the combined outcome of them is not statistically significant as opposed to the Soros case. I find it very hard to disagree, although I am more in tune with Buffett's investment style as such.

 

 

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Guest dealraker

What a waste of time to even think this stuff---- unless.....hmmmmm.... you desparately want attention.  The it all makes perfect sense.  It is the Doug Kass model of "say anything to get recognized - even if you are recognized as an idiot."  There's a lot of that going on in our world today.

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It reminds me about the stories about Gauss, Newton and other scientists, their final papers were rigid and seemed like genius but their private work books were full of learning, trial and error, dead ends, etc.. It's like saying somebody practices every day to become truly great and then shows the world very rarely that greatness and there is not enough evidence. How can we know how much reading and hard work went into every "rare" investment decision?

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Dealraker - you nailed it.  Complete garbage.

 

Read Lowensteins book - specifically, the chapters where he ran his partnerships.  He kicked ass left and right.  This was before Berkshire Hathaway.

 

The bigger question is "did he get lucky twice?"  And his personal account did well.  Maybe lucky 3 times?

 

 

 

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Taleb and Soros have a mutual intellectual inheritance, both being Popperians.

 

Also, the superinvestors story does not provide rigid evidence of Buffett and other value investors non-luck, merely circumstantial ones (which may or may not be subject to different biases). For Taleb that makes all the difference in the world. Although, I still believe that if he were to GUESS he would rather guess that Buffett was not only lucky. I wouldn't draw too many conclusions from this. The only thing he says is that Buffett has made far fewer bets than Soros and that the combined outcome of them is not statistically significant as opposed to the Soros case. I find it very hard to disagree, although I am more in tune with Buffett's investment style as such.

 

 

 

 

A recent post referenced a thorough statistical study of WEB's stockpicks over several years.  The conclusion:  he could be merely a lucky monkey if you look at just the percentage of picks that increaced in price.  But, if you look at the magnitude of his outperformance, there's no doubt that skill is involved.  Taleb should read that study before he next expresses his opinion.

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The concept of buying a dollar for 50 cents seems too hard to grasp for a statistician.

True, but when was the last time that Buffett bought a Dollar for 50 cents?

 

To me at least, Buffett has been using two approaches in his investment career. The first is the pure Ben Graham approach of buying unloved stocks that are selling below book value. If Taleb refutes this approach, he clearly doesn't know what he's talking about as we have actual (Graham-Newman, Buffett Partnership, Schloss Partnership) long-term outperformance.

 

The later approach that Buffett uses (the buying and holding of great businesses) is impossible to evaluate considering Buffett is really the only investor who has a record of long-term performance. Therefore, Taleb does actually have a point that Buffett may actually be lucky (post-Pertnership days anyway).

 

Buffett once said he was 15% Phil Fisher and 85% Ben Graham. If you ask me, he's the other way around now. If you look at the BNSF deal, the only Ben Graham characteristic there is the margin of safety. It's certainly not cheap, not unloved, not depressed, and not a cigar butt by Graham standards.

 

I think it's kind of funny. So many people cite Ben Graham and the demonstrable proven performance his methods bring, but yet so few actually use his method as intended. Even with you guys, from what I can see of your portfolios and the stocks you talk about, the majority of you do not invest like Ben Graham. That's not a criticism of anyone by the way, obviously Ben Graham isn't the only investment philosophy around! From what I can see though, it is wrongly cited.

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The concept of buying a dollar for 50 cents seems too hard to grasp for a statistician.

True, but when was the last time that Buffett bought a Dollar for 50 cents?

 

To me at least, Buffett has been using two approaches in his investment career. The first is the pure Ben Graham approach of buying unloved stocks that are selling below book value. If Taleb refutes this approach, he clearly doesn't know what he's talking about as we have actual (Graham-Newman, Buffett Partnership, Schloss Partnership) long-term outperformance.

 

The later approach that Buffett uses (the buying and holding of great businesses) is impossible to evaluate considering Buffett is really the only investor who has a record of long-term performance. Therefore, Taleb does actually have a point that Buffett may actually be lucky (post-Pertnership days anyway).

 

Buffett once said he was 15% Phil Fisher and 85% Ben Graham. If you ask me, he's the other way around now. If you look at the BNSF deal, the only Ben Graham characteristic there is the margin of safety. It's certainly not cheap, not unloved, not depressed, and not a cigar butt by Graham standards.

 

I think it's kind of funny. So many people cite Ben Graham and the demonstrable proven performance his methods bring, but yet so few actually use his method as intended. Even with you guys, from what I can see of your portfolios and the stocks you talk about, the majority of you do not invest like Ben Graham. That's not a criticism of anyone by the way, obviously Ben Graham isn't the only investment philosophy around! From what I can see though, it is wrongly cited.

 

 

Buffett may be one of the few investors with an extensive long term record for comparison, but that's not needed for statistical analysis.  All that's needed is to run a Monte Carlo simulation of what a large number of ignorant monkeys would have picked during the same period, and use that for comparison to determine if skill was involved in Buffett's picks.

 

Buffett has been an investor mainly in what are simplisticly called large cap growth stocks for the last 35 years.  This is a most difficult category for outperformance because you're going against the headwind of small cap advantage, and you're competing against those who concentrate on the most analyzed stocks on the planet.  Therefore, Buffett's record is even more remarkable!

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I think too many people here want him to buy ITEX b/c it is cheap.  But this guy is focused on the big dogs.  I am still amazed this guy turned a crappy textile mill into a company owning more than 10% of Coke, a big piece of Goldman Sachs, and big piece of Kraft, etc...

 

While I believe maybe as others do that the BNI deal wasn't cheap, it is time to get over it.  If government regulations allowed for him to buy banks, he probably would have bought many banks.  But he can't/won't. 

 

I would look for BH to digest the BNI deal and make other splashes in pipelines and/or utilities, or whatever becomes attractive. 

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Dealraker - you nailed it.  Complete garbage.

 

Read Lowensteins book - specifically, the chapters where he ran his partnerships.  He kicked ass left and right.  This was before Berkshire Hathaway.

 

The bigger question is "did he get lucky twice?"  And his personal account did well.  Maybe lucky 3 times?

 

 

 

 

There have been hints over the years that WEB's personal account has increased in value much more than BRK's during the last several years.  One of the disappointments of Schroeder's book is the lack of information about personal performance.  I believe this was intentional because critics would have jumped on the difference in performance.

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Not sure what people want from Buffett.  He is a leader on the following fronts:

 

1) Risk management

2) Treating shareholders like owners

3) Capital Allocation

 

and never before seen until recently ... 4) Philanthropy

 

 

Any wasted breath on criticizing this guy should be spent on the Jerry Yangs, Chuck Princes, and John Thains of the world.

 

 

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One of the disappointments of Schroeder's book is the lack of information about personal performance.  I believe this was intentional because critics would have jumped on the difference in performance.

 

I dont believe Schroeder left anything out because of critics would have gotten at Buffett.

 

 

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Guest dealraker

And again I think what I have found interesting is typified on the gurufocus site where one of the most frequent poster/experts (gulp)  is a fellow who has a website called "beatingbuffett."  This gurufocus is a so-called value investing website where the posters routinely have an assault on Buffett that is intense.

 

Being older I have a couple of thoughts about this and some may not be well-received.  First I think older people are often very threatening to those much younger and that's simply because deep within us we greatly fear aging- it is threatening.  So the don't get attached in any way to anyone as old as Buffett - and this is part of the problem with those thinking (actually fearing) they are investigating him.

 

Second, I sense a strong envy of Buffett that motivates many to challenge everything about him personally and professionally.  You can almost be certain that you have Buffett envy (in my opinon) if you are willing to state or write "I am not envious of Buffett."

 

I, for one, sense that I am envious of Warren Buffett.  Flat out envious.  His record is damn daunting- overwhelming- and what is futher frustrating is that it continues as we speak and it is very hard to find anyone who thinks Berkshire's stock is a value.  The yawn factor suggests to me (along with the numbers) that Berk will outperform 70-90% of all stocks within the next 5 years.

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One of the things that Taleb talks about in one of his books is blow ups.  People who make 100 million for 10 years straight and then blow up and lose it all in about 10 minutes.  Remember that Buffet almost blew up at least 2 times.  Soloman and Gen Re.  I seem to remember there was a possible blow up with one of the newspapers as well.  Still I agree that Taleb doesn't know much about Buffett, and is pretty full of himself.

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One of the things that Taleb talks about in one of his books is blow ups.  People who make 100 million for 10 years straight and then blow up and lose it all in about 10 minutes.  Remember that Buffet almost blew up at least 2 times.  Soloman and Gen Re.  I seem to remember there was a possible blow up with one of the newspapers as well.  Still I agree that Taleb doesn't know much about Buffett, and is pretty full of himself.

This is right to the point and a huge reason why Taleb is making this statement. There is just no way we could quantify Buffett's blow-up risk, in particular that of his past, because now a blow-up wouldn't affect as big a part of his holdings.

 

I am by the way getting sectarian vibes by the people who are making this an issue about Buffett's person. You are reading so much in to this statement that is not there, probably because it gets so much easier to repudiate. Taleb has not put forward any criticism at all (and I am seriously wondering about this article since I saw a video one or two years ago where he made the exact same statement, newsworthy now, eh?).

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You might want to keep in mind that 'value' benefits are almost always referenced in terms of a compound return relative to the index. Perfectly correct, & looks great, but glosses over the very lumpy & often negative returns incurred along the way.

 

The reality is that you'll make errors, they'll be costly & potentially even fatal; you'll look like a dunce. You'll look like a hero if you recover; & if you're good at recovering you'll look like a hero more often than you look like an idiot. Taleb's just looking at the errors.

 

SD

 

 

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Taleb's warnings about blow-ups actually mirror Warren's and Charlie's. Stories like the hubris and eventual collapse of "Long Term Capital Management" (LTCM) assuming that Black-Scholes was exact and that six-sigma events couldn't occur. Warren also warns of the use of excessive debt leverage to juice returns because of the probability of spoiling a long series of great returns by multiplying just once by zero!

 

These blow-ups they refer to wiped out all the equity of the entity concerned. Did Gen Re and Salomon really have the chance of blowing up to the extent of destroying all or most of the equity in Berkshire Hathaway? Sure, we spent large sums unwinding complex derivatives at Gen Re whose consequences, correlations and probabilities weren't understandable. That's part of Warren and Charlie's focus on limiting the single-event loss and all correlated losses to amounts we could cope with, be they mega-cats or derivative-related losses. Who knows how much the recent economic downturn might have cost if they hadn't unwound those Gen Re derivatives.

 

I don't think that in the last 20-30 years there has been a set of correlated remote risks that threatened Berkshire with as much as a permanent loss of 50% of its capital, let alone 100%. To have achieved so much growth with no appreciable debt leverage is quite remarkable.

 

If I'm wrong about a risk of blow-up of BRK as a whole, please point me to information I ought to digest.

 

I don't think Taleb is criticising Buffett, just stating that he's more confident in asserting that Soros is possessed of skill not luck, than he is of stating the same about Buffett. That may be more to do with what Taleb understands and what is in his comfort zone than what is supported by evidence and logic in a sometimes-inefficient market model that all of us here accept. He also probably considers the concentration (large bets, lack of diversification) in Warren's portfolio to be the plausible mark of someone in an Efficient Market trading "risk" (= short-term volatility in our language) for the chance of a better return. The fact that he also made fewer bets (but bigger ones), might imply to Taleb that he's potentially just a statistical outlier in a random system. I think the recently posted PDF (in this post by Parsad: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1812" data-ipsquote-contentclass="forums_Topic" 15127#msg15127) shows that according to EMT, Buffett's performance in publically announced common stock investments alone is consistently beyond that of even an extremely remote outlier.

 

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The fact that Taleb's comments about Soros and Buffett discuss statistical evidence should let you know exactly what you are dealing with.  Buffett doesn't make many bets.  In fact, how many bets do you think Buffett has made in the Buffett Partnerships and Berkshire since starting?  Say ten a year for 50 years...maybe 500 material bets with capital.  And what has his batting percentage been on those 500 bets?  I would guess 90% or better, since Munger has said Buffett has never lost more than 2% of capital on any investment.  

 

How could Taleb or anyone else believe that batting 0.900 is not luck.  It's beyond the realm of understanding for economists, no matter how smart they think they are.  Cheers!

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