This article basically repeats old economic saws of dubious validity. The counter argument is Warren Buffett. Last I looked at it (going back to his Buffett Partnership days), he beat the market every year but one for his first 30 or 40 years. Even better, he was beating the market by an average of 20% a year during his partnership days, and something like 10% a year during his first 20 years running Berkshire Hathaway.
It's not only statistically impossible for Buffett to be a fluke, it's statistically impossible for him not to possess a a skill providing a substantial edge in market investing. Not a "1% a year" type skill.
Nowadays and for the last 20 years or so, Buffett has been managing hundreds of billions of dollars. The immense size of his portfolio restricts his opportunities to a far smaller pool of potential investments and his edge over the market has clearly declined because of that restriction. But he's still beating the market the vast majority of the time.
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.
It's worth pointing out that Buffet doesn't invalidate the weak efficient market hypothesis (the usual contender), because he generally doesn't like to trade in the open market.
His preferred approach has always been to buy entire companies, usually private companies, outright. Where there is no highly liquid market, there cannot be an efficient market in the theoretical sense. He prefers to invest when it is actually possible to possess information or insights that have not been widely distributed to other potential buyers via public disclosure. There is a similar dynamic at work in real estate, where local knowledge allows outsized returns to some participants.
The main source of free cashflow for Berkshire Hathaway has always been insurance, itself a risk-based industry. His main advantage has been to rigidly underwrite for profit, not for volume, giving access to cheap float.
None of these things are easily duplicated by regular folks and their advantage diminishes sharply with scale, as Buffett himself has warned Berkshire Hathaway shareholders for year after year.
I admire him and I think he's a useful foil to purely statistical views. But I also think luck plays its part. He's flubbed billions of dollars on both foreseeable (textiles) and less foreseeable (airlines) events.
Yea, he built an amazing track record well before he started to buying businesses outright (and in dollar volume he's spent far more on public companies than private). His preference for buying companies instead of shares only came around later in his career, and solely due to the massive size of his portfolio that his success created.
He didn't get into insurance until about 20 years after he started investing. His greatest returns were before it.
Buffett/Graham believe in concentrated portfolio, not having too many positions in your portfolio, because if you have more than 20 or so positions its difficult to know any of them well. So this means when his portfolio grew in size, he started losing opportunities in the public markets because many companies were too small for him to buy enough of to have a reasonable position. So he ended up investing in larger cap companies, and buying smaller cap companies outright.
And his biggest flub wasn't textiles or airlines, it was maintaining Berkshire Hathaway as his investment vehicle. He gives a free ride (no fees) to investors on half his results, and because of the double portfolio size restricting his investment options, his returns are lower. He would have had a substantially higher returns if he just invested his own money, or if he had kept running an investment partnership and taking fees. He's cost himself at least $100B in personal wealth.
But despite his very infrequent mistakes, he's beat the market by well over 10% a year during his investment career, and there is almost no luck in that.
> Yea, he built an amazing track record well before he started to buying businesses outright
He himself has said that the easy days are long over. The actual stock market continues to form a closer and closer approximation of weak EMH.
> But despite his very infrequent mistakes, he's beat the market by well over 10% a year during his investment career, and there is almost no luck in that.
He beat the stock market, by and large, by not participating in it.
Owning insurance companies and buying companies outright is not a strategy I can pursue with my 401(k).
I like Warren Buffett. I've read the first 50 Berkshire Hathaway letters. I think both he and EMH proponents are "correct", but largely they talk past each other. Where they agree is that what works for Warren Buffett only really works for Warren Buffett. His literal advice to regular investors is to buy index funds.
I somewhat agree with you, but I don't think the market is necessarily converging to weak EMH. I think it's more fair to say that as the market changes over time, the skills required to reliably beat the market fundamentally change. It used to be that you could spot market inefficiencies with an MBA and a solid understanding of specific domains. Nowadays, you model the market as a physical system and look for obscure phenomenon.
On the one hand that sounds like what you're saying - the market is becoming more efficient. On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry.
I agree with you and disagree with other posters here.
It's physically impossible for the market to be efficient.*
Just try to use the efficiency for anything (set up any series of steps where one of the steps is "...because the market is efficient, therefore...") and whatever you've just set up just plain won't work.
Since it's impossible, instead of any version of the efficient market hypothesis people should just say "God's will" (as in God's will that prices should reflect available information), and it will show how silly they are.
* you can email me if you'd like a rigorous proof that it is impossible
The weak EMH is pretty simple: there's money to be made in arbitrage, but the act of arbitrage spreads information. So a price quickly converges to reflect available information. The harder participants try to beat the market, the harder it becomes.
What's left is the lurch of prices upon truly novel information arriving. Stocks appear to move up and down at random, because future events are not fully predictable. If they were, prices would stabilise around the "true" price and remain stuck there.
A similar argument has been used to show that time travel has not and will never be invented. Arbitrage across time would be even more profitable than arbitrage across space.
> On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry.
Sorry, I guess I wasn't clear. What I meant was that while finding alpha has indeed gotten harder over the past several decades, there are different candidate hypotheses to explore what will happen in the future. I interpreted your comment as a hypothesis that the market will continue to become more efficient as it essentially achieves weak EMH. However, I believe that you could consider the hyper-efficiency of recent times to be a natural byproduct of software and automation becoming ubiquitous.
Information gets cheaper, faster and more accessible over time but I believe that there's a diminishing return in how much more efficient the market can get without another huge jump in technology.
For example, HFT (specifically, the sort where you're actually thinking about the speed of light) is not categorically improving dramatically year after year anymore. The market is getting more efficient, sure, but it's getting more efficient very slowly, and would argue the rate of efficiency increases is decreasing. Without another categorical jump in technology (e.g. significant AI, quantum computing, etc) that dramatically improves data cleanliness or accessibility, I don't see the market getting significantly more efficient than it is now. And I don't agree that the market is yet at weak EMH.
Yeah, Buffet is actually not the best case to back up this argument with. RenTech/Jim Simons [0] is probably a better example of making money on pure skill.
The argument here suggests that there may be choices to make that guarantee LOSS, not success. In that case, learning how to avoid the 'automatic loses' is important and the more people that learn it, the closer things revert to the power-law distribution.
I see no reason to conclude the hyper-winners are more than just luck. Perhaps all the '1% edge' associated with talent is simply avoiding bad mistakes that always deliver a loss. If everyone performs optimally, it becomes entirely and completely luck.
I guess it's a lucky thing that'll never happen? I seriously think the only skill involved in investing is a combination of humility and an admission that you're not smarter than everyone else. It keeps you medium conservative and provides solid returns.
It's impossible to empirically examine whether or not humility and reverse-Dunning-Krueger is important for trading acumen. On the other hand, it's demonstrable that domain knowledge and business acumen, or mathematically modeled market signals and statistical insight can result in reliably superlative returns.
"We find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails. Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett’s performance."
This paper only starts in 1976, so it skips the first 20 years of Buffett's career when he used virtually no leverage and had his highest returns.
It also has problems with the classifications of his investments. It's a common problem for academic analysis of investing, if value investing works then I should be able to outperform solely buy purchasing stocks at low PE ratios, right? This doesn't work, so value investing "can't" work.
The truth is it's a skill. You have to be able to find businesses with long term competitive advantages selling at a substantial discount to their intrinsic value. You have to have the courage of your conviction through market cycles and not abandon your purchases even cheaper. You have to eliminate sources of bias in your analysis (Buffett won't look at it's price before he analyses a business so his valuation isn't affected). If you read Buffett there are a ton of things he does to limit bias in his job.
This is well covered by Charles Ellis: The stock market has changed dramatically since the 70s, when most money was invested with almost no information. Getting key information well ahead of the market was relatively easy. A lot of people made a lot of money then, until the amount of 'smart' money rapidly increased.
It's still possible to get better returns than average on the market: After all, most of congress does this. But the one way to do it is precisely like congress does, by having information that the market is unaware of.
This is what make people move money into venture capital: It's a way to invest into things most of the market is unaware of, and whee the number of players is small enough that it's still possible to get privileged information.
Buffet's current plan is only doable because he has access to more information, and has such a gigantic bundle of money that any effort to get an edge will be multiplies by investment size.
Where does the wealth of the richest people in the world come from? Tremendously risky bets, going heavily into a single, extremely successful venture that they had special access to. But what makes their ventures win, vs those of second players that did badly in the same industry? Non replicable things, distributed in a way you could call luck.
Isn't in general, before the Internet , making money in business was much easier, hence qualititavely different, and maybe skill played a bigger role then ?
It is, but it's similar to covering a start-up after their initial hockey stick growth. How to maintain growth is interesting, but definitely not the whole story.
> He prefers to invest when it is actually possible to possess information or insights that have not been widely distributed to other potential buyers via public disclosure.
This is exactly the opposite of what he claims in his essays. One quote:
> The other way we differ from some arbitrage operations is that we participate only in transactions that have been publicly announced. We do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities.
There are several others in "The Essays of Warren Buffett" where he also describes how he just uses public information.
Again, there is a distinction between buying private businesses outright and buying in the open market.
In the former case, Buffett solicits sellers to directly contact him. He makes this solicitation every year in his letter to Berkshire Hathaway shareholders.
In the latter case, Buffett recommends the Financial Times as a source of information.
Buffet doesn't claim it's impossible to beat the market. He only says that the vast majority of investors cannot pick individual investments accurately enough to beat a diversified, low-cost index fund in the long term. There are a bunch of caveats in here, namely LONG TERM – you might get lucky and strike it rich once or twice, but you are very unlikely to have those lucky investments pan out over decades.
Yes, Buffet is incredibly skilled. Buffet actually claimed once that he was born with a preternatural ability to invest in companies. The whole "you can't beat the market" quote is meant more to say that we mere mortals are to Warren Buffet what normal people playing pickup basketball are to Michael Jordan.
A better way of saying it is that the whole of investors are better at accurately predicting the value of a company than individual investors. Which sounds almost like a truism when you put it in those terms.
It wouldn't, no. Their strategy is limited by size, and they're returning profits (that they can't invest further) to investors every year. I.e. the returns aren't compounding (any longer).
Obvious counterpoint: it's statistically "impossible" for Buffett specifically to beat the market in the way he has. Is it similarly impossible for some person to beat the market in the way he has? Let's call this hypothetical individual Warren Buffett.
Read super investors of Graham Doddsville, Buffett wrote it and demonstrated there are dozens of value investors with similar results to him, and they all adopt an extremely similar strategy but apply it in very dissimilar investments.
And the coin flipping paradigm is wrong. The odds of beating the market by 10%+ a year is not a 50-50 proposition. It's more like a 1 in 10 chance. So re-run your stats with Buffett going 50 for 53 on 1 in 10 shots.
Technology is still a novelty. We've barely dipped a toe in the digital age, the vast majority of changes are yet to come. We probably haven't written 1% of the software we'll be using in 20 years.
It's not only statistically impossible for Buffett to be a fluke
I'm curious, do you have any evidence of this? "Statistically impossible" means "zero probability". If that's really your argument then you need to back it up.
you just confirmed what keeps people from uderstanding this truth: confirmation bias.
you just picked one person out of billions of investors. what is more improbable? that he is flipping a coin 40 times and got head all the time or that billions of people cant see what he sees?
also, buffet is the perfect example of why you should not invest, as he beats the market by not investing in the market.
> what is more improbable? that he is flipping a coin 40 times and got head all the time or that billions of people cant see what he sees?
Actually, the probability of getting a head 40 times is 1/2^40, which is 1 in about 1.1 trillion. If we assume there are 1 billions investors overall, the probability that at least one wins 40 times (which is the probability that one or several Warren Buffet could appear by luck in this simple model) is about 0.00091.
So yeah, in this particular phrasing of the question, with this model, the less likely option is to flip a coin and get head 40 times and the more likely option is that there is something else, like talent.
>>Actually, the probability of getting a head 40 times is 1/2^40, which is 1 in about 1.1 trillion
I bet that the odds of beating the market 40 times are even worse since it is not a simple binary choice. The better analogy would be to choose the correct face of a 6 sided dice 40 times in a row, or even better a 100 sided dice. Calculate the odds for that! (I'm too lazy to do it myself)
hrzn says:"So yeah, in this particular phrasing of the question, with this model, the less likely option is to flip a coin and get head 40 times and the more likely option is that there is something else, like talent."
Before concluding "talent" is responsible, you must exclude other possibilities in the "something else" category (e.g., intelligence, insider information, control of upstream/downstream resources, etc.).
Wealth allows access to resources unavailable to those w/o wealth.
I Absolutely agree. Overall it's probably a mix of many things like luck, talent, insider information, ability to go against dominant investing ideas, where you start in life (if you are wealthy at birth that's equivalent to many coin-flips), etc.
>>You just confirmed what keeps people from understanding this truth: confirmation bias.
It seems a bit hard to believe that this is just confirmation bias. What are the odds that he guesses correctly almost 40 times in a row? It is possible but not likely. If he is not really as good as we think he is then you could also say that he is doing insider trading and he just hasn't been caught.
Honestly I don't buy the theory that he is just extremely lucky.
Did you not read the other comments in this thread talking about the numbers?
The probability of repeatedly beating the market the way Buffett has done it is several orders of magnitude lower than the probability of winning the lottery. That's the point.
Your analogy is a poor comparison. Winning the lottery is not like picking stocks because it's almost perfectly efficient. No player in a lottery has any insight about what the winning numbers will be that, let alone an insight that other players don't have. It's an absolute black box.
I know what you're thinking. "The stock market is a random walk! Efficient market hypothesis!" But the market is not a black box. You can legally gain insight that other participants don't have and use that insight to profit.
Other people have done the math in this thread. The human population would need to be orders of magnitude larger than it is now, and every human would need to be an active, failing market participant, in order for the successful traders we see being the result of chance.
Buffett has always invested in the market. The last half of his career he has made many private investments, but his fortune was built on public stock market investing.
His average returns with the Buffett Partnership were in excess of 35% a year. That's not coin flipping. The odds of a 35% return when the stock market is returning 10% is probably closer to one in a hundred. doing that for a decade straight is insane.
Then follow it with 40+ years where he beat the market every year but a couple, and not barely crushing on average by over 10% year (probably 10-1 against each year), even when handicapped by an enormous portfolio.
Dubious validity?? Participate in the market and try to replicate what you think are dubious counterarguments with achievable and repeatable results.
People like Buffet and Einhorn are extreme anomalies. So much so that they are legendary, they are that unusual. There are only a small handful of legendary investors throughout history for a reason.
"It's not only statistically impossible for Buffett to be a fluke, it's statistically impossible for him not to possess a a skill providing a substantial edge in market investing. Not a "1% a year" type skill."
No. It's statistically impossible for him to be the NORM, or some sort of aspirational figure. Statistics is exactly how we can measure how much of a fluke he is, and how lucky he's been. Give him 2% for ultra-talent, and another 5% for trading on the fact that he's Warren Buffett, and he's still a fluke. He is just able to put a thumb on the scales for personal/emotional reasons: implying to people like you that he's not a fluke. The odds of him being in that position are very long odds, and he lucked out and has taken advantage of it. If you run a lottery and draw one ticket, that's long odds but by definition one person will have won.
This seems like some form of the lottery fallacy: that because an event occurred (some guy beat the market over a long period of time), it must have been the result of some forces (his skill) overcoming luck.
Not only that, but it fails to consider that many times, a large wealth, is not built with an extra 1% per year, but by one large hit. People have failed 20 years to then become rich on one good idea. You could call it luck, but to be realistic that's not luck, that's perseverance, work ethics and commitment to do something important. I agree we need to look for a way to build a more even play field and remedy the atrocious way we assign resources, but claiming that people that work hard to make a difference are just "lucky" is a terrible way to do it.
I don't like those quotes (like 'the harder I work, the luckier I get') because 'luck' by it's very definition is random. We had a horrible situation in Melbourne yesterday where some nutbag drove his car down a busy sidewalk killing 4 people. It was luck (very bad luck) that those people were there in that moment and killed. That's luck. And btw, my partner and kids were there only 5 minutes before.
It's not only statistically impossible for Buffett to be a fluke, it's statistically impossible for him not to possess a a skill providing a substantial edge in market investing. Not a "1% a year" type skill.
Nowadays and for the last 20 years or so, Buffett has been managing hundreds of billions of dollars. The immense size of his portfolio restricts his opportunities to a far smaller pool of potential investments and his edge over the market has clearly declined because of that restriction. But he's still beating the market the vast majority of the time.