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Taleb -- Why It is No Longer a Good Idea to Be in The Investment Industry


WhoIsWarren
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I don't know if the board has seen this already, but this is an interesting (and depressing) 'thought experiment' by Taleb.

 

It's quite maths-y but not too long.  In summary (and correct me if I've got this wrong), in the highly random world of investment, where the outcomes are very likely to exhibit fat tails, the more investors there are, the greater the chance of finding stunning but nevertheless spurious, random results.  Investment is a winner-takes-all type business, hence money is likely to gravitate towards those 'winners'.  The bottom line is that the likelihood of someone with genuine skill succeeding in the investment business is very low.

 

[it's also a fantastic reminder of why we should be slow to follow and believe in our investment heroes].

 

http://www.fooledbyrandomness.com/spurioustail.pdf

 

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I don't know if the board has seen this already, but this is an interesting (and depressing) 'thought experiment' by Taleb.

 

It's quite maths-y but not too long.  In summary (and correct me if I've got this wrong), in the highly random world of investment, where the outcomes are very likely to exhibit fat tails, the more investors there are, the greater the chance of finding stunning but nevertheless spurious, random results.  Investment is a winner-takes-all type business, hence money is likely to gravitate towards those 'winners'.  The bottom line is that the likelihood of someone with genuine skill succeeding in the investment business is very low.

 

[it's also a fantastic reminder of why we should be slow to follow and believe in our investment heroes].

 

http://www.fooledbyrandomness.com/spurioustail.pdf

 

It is not.  There is an expectation of profit in investing, unlike gambling where it is necessary to have an edge to beat the field. 

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Here s another formula.

Value of company is x.

When price =.5x, buy.  When price = x, sell.

 

Taleb says it s all luck.  I say he s full of sh* t . . . and formulae.

 

Edit:  You re right, he s not saying it s luck.  What he is quantifying has price at it s heart and therefore does not resonate at all for me.

 

Value is what you get, I think you're misinterpreting the nub of the issue.  Yes I know that Taleb says some blasphemous things (like questioning Buffett's record!), but you've got to admit that luck plays a huge role in investment.  Added to that, there are a huge amount of spoofers in the industry (whether they know it or not), so you are bound to have lots of randomly outstanding track records.  So you think that over the long run luck evens out?  Yes, but that's over the very long run.  I've seen reference to the fact that it would take over 100 years of a track record to "prove" skill one way or another.

 

Recently enough the book 100-to-1 in the stock market by Thomas Phelps was mentioned on this board.  I'm halfway through reading it.  Phelps has got a lovely quote in there from one of his mentors, a guy who set up the research lab at Du Pont.  The quote goes something like: "The problem with finance and economics is that we are always working with dirty test tubes."  This is the truth of it and I've got to say that the value fraternity are sometimes too zealous in their beliefs that they cannot accept alternative views or criticism.  The easiest thing in the world is to talk about 50 cents for dollar bills.  Just try prove it -- you can't!

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[it's also a fantastic reminder of why we should be slow to follow and believe in our investment heroes].

 

 

Well, it is a even more fantastic reminder of why we should be slow to believe in OUR investment capabilities!!  ;)

It is easy to deceive ourselves into thinking that, just by emulating Mr. Buffett or Mr. Watsa, we will get outstanding investment results… when the truth is most probably we will never completely understand the true secret of their very personal success! Because every one of them is an original, even if they certainly share common beliefs and ideas.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

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Although I have not enjoyed his latest writings, Taleb (via Marks and in Fooled by Randomness) did give me a nice perspective shift in thinking about investments/risk/results.  I think his framework for risk is extremely valuable, although I'm not sure he draws the correct conclusions with that framework, e.g., with his recommended long vol and bond portfolio.

 

Regardless, it is very disconcerting to believe that an individual investor won't know if he is good or merely fooling himself until a long period of time has lapsed, especially if the period of time required to know if you are good eclipses your required investment horizon (e.g., retirement).  Every time I discuss this with people, they just don't seem to get it, and keep thinking good results necessarily means skill, even at 1-3 years.  In any event, his message seems to have more to do with mainstream investment managers rather than individuals or small hedge funds with understanding partners, so, though his stance makes prima facie sense, I doubt it is all that pertinent to many of us on the board.

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In any event, his message seems to have more to do with mainstream investment managers rather than individuals or small hedge funds with understanding partners, so, though his stance makes prima facie sense, I doubt it is all that pertinent to many of us on the board.

 

That's probably a fair comment, especially in the US or Canada where I understand that the cost of setting up your own (hedge) fund is quite low.  In other jurisdictions (Europe) the costs and regulatory hoops are prohibitive unless you have reasonable scale.  Unfortunately there are too many spoofers (with and without track records) feeding from a small trough.....

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I enjoyed listening to his latest book.

 

Found some very useful concepts.

 

It seems that sometimes he is just too smart i.e. all that algebra. in this posting.

 

From his conclusion:

 

"To conclude, if you are starting a career, move away from investment management and performance related lotteries as you will be competing

with a swelling future spurious tail.  Pick a less commoditized business or a niche where there is a small number of direct competitors. Or, if

you stay in trading, become a market-maker."

 

it seems that he is directing this to short term investors/traders rather than business owner types like folks here.

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[it's also a fantastic reminder of why we should be slow to follow and believe in our investment heroes].

 

 

Well, it is a even more fantastic reminder of why we should be slow to believe in OUR investment capabilities!!  ;)

It is easy to deceive ourselves into thinking that, just by emulating Mr. Buffett or Mr. Watsa, we will get outstanding investment results… when the truth is most probably we will never completely understand the true secret of their very personal success! Because every one of them is an original, even if they certainly share common beliefs and ideas.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Self belief is the most important aspect of any type of success. Its the 80/20 rule. The real winners are the 20 percent of the players in the game . Not everyone can be an all star thats okay. What matters is do you enjoy playing the game.  Is investing a healthy habit. The more i read about the greats in investing ( and on the forum here ) the more i'm convinced the secret to be the best is intuition. Its a gut feeling when to go " all in" or take a step back and reverse course. I wouldnt even say its temperament( although its very important). They know how to make money and know what a good deal looks like.  Its more than saying you are a contrarian.  Thats just a label and intrinsically means nothing. Its the greatness or essence in them that fully aligns them to make money. Yes there are rules and guidelines. But the greats have that innate ability to make seemingly make  "risky" bets feel normal and natural. They get excited when that opportunity comes. They act quickly because they KNOW its a great deal.

 

Reading is great, have rules/guidelines, and reverse engineering are all wonderful. But, to be in  a different class there comes a time where you have to act quickly to a opportunity bet big where the whole world is seemingly against you. Thats what makes money. Betting Big when the world is against you. This ultimately comes down to your intuition and no excel sheet with formulas.

 

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The distinction I miss here is between making a career out of managing OPM and managing your own money. In the first case you probably need a huge amount of luck (besides skill and work ethic) to become one of the big fund managers. But I think a lot of people here aren't really interested building a career in the industry, they just want to invest their savings wisely. In that case you don't give a shit about the rat race as long as your results are good enough for yourself.

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Reading is great, have rules/guidelines, and reverse engineering are all wonderful. But, to be in  a different class there comes a time where you have to act quickly to a opportunity bet big where the whole world is seemingly against you. Thats what makes money. Betting Big when the world is against you. This ultimately comes down to your intuition and no excel sheet with formulas.

 

Sorry, I have to disagree completely :).

 

I think that you have to be completely rational and you should have all your facts straight: only then can you make an informed decision about price vs. value. My intuition can't tell the difference between Bear Stearns right before it collapsed and Bank of America when it was trading at $5. Only good research can. In time, all the effort you put in investing will probably result in a 'gut feeling' about investments in the future. That feeling might be right most of the time but it is the result of years and years of hard work and it should always be double checked. Grandmasters in chess also see the right move in 99% of the cases, but in a critical position they still revert to the hard work of calculating all variations to make sure they're right. I'm pretty sure Warren Buffett and Bruce Berkowitz do the same.

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Reading is great, have rules/guidelines, and reverse engineering are all wonderful. But, to be in  a different class there comes a time where you have to act quickly to a opportunity bet big where the whole world is seemingly against you. Thats what makes money. Betting Big when the world is against you. This ultimately comes down to your intuition and no excel sheet with formulas.

 

Sorry, I have to disagree completely :).

 

I think that you have to be completely rational and you should have all your facts straight: only then can you make an informed decision about price vs. value. My intuition can't tell the difference between Bear Stearns right before it collapsed and Bank of America when it was trading at $5. Only good research can. In time, all the effort you put in investing will probably result in a 'gut feeling' about investments in the future. That feeling might be right most of the time but it is the result of years and years of hard work and it should always be double checked. Grandmasters in chess also see the right move in 99% of the cases, but in a critical position they still revert to the hard work of calculating all variations to make sure they're right. I'm pretty sure Warren Buffett and Bruce Berkowitz do the same.

 

writser,

I agree with you and I am a true believer in “deliberate practice”. Yet, almost by definition, very few investors will be in the same league of Mr. Buffett and Mr. Watsa, right? What I think premfan is trying to say is that the secret to be in that league cannot be exactly… in plain sight!! What kind of secret would it then be?! That’s why study is important, research is important, hard work is important, though maybe they are not really sufficient…

Remember that “deliberate practice” is not just… practice. Instead, it is to find and to deeply analyze your weaknesses, and then to devise exercises in order to eliminate those weaknesses, and to repeat those exercises from early in the morning to late in the night. To do over and over again what you are most uncomfortable in doing! As soon as you have been successful in eliminating one weakness, to concentrate on the following weakness. And to repeat the process as many times as possible.

So, is it really a surprise to find that the path followed by every extremely successful person is very unique?

I have long ago given up trying to fathom why someone is successful, and why others are not… Instead, I just stick with successful people. Both in the businesses that I control and in the businesses in which I invest.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

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