10 ms·

Wow, that's an average 26% per year increase (for the non-inflation-adjusted data) over a 70 year timespan. That's definitely not a random walk down wall street

Wow, that's an average 26% per year increase (for the non-inflation-adjusted data) over a 70 year timespan. That's definitely not a random walk down wall street [1]. For reference, Dow Jones seems to have about 7% per year for the same time period. [1] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

yodsanklai 10y ago
Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI https://www.youtube.com/watch?v=ARrNYyJEnFI and I've been pondering this efficiency hypothesis. Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision. What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea). I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.
- svantana 10y ago
  It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)? 1. http://blogmaverick.com/2013/01/10/the-stock-market-2/ http://blogmaverick.com/2013/01/10/the-stock-market-2/
  - freyr 10y ago
    He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.
- Marazan 10y ago
  The market is irrational but it can stay irrational longer than you can stay solvent.
- enibundo 10y ago
  You misspelled that asshole's name. Find another teacher.
  - Shanea93 10y ago
    I'm not really sure you understand the situation. A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition. The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid. The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis. They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills. When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same. Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive. You should really investigate the situation fully before blindly believing the story the media has sold to you.
    - lotsofpulp 10y ago
      How can nothing change for the end user? If the insurance company is picking up the tab, then the cost of insurance has to rise and/or the insurance benefits have to be cut (i.e. drug is no longer covered or co pay rises).
      - Shanea93 10y ago
        Well, the good thing about Daraprim, the drug for toxoplasmosis, is that it completely cures you of the condition. So sure, your insurance will rise because you made a claim, but it won't raise that much, since you don't have any medical conditions going forward. Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.
- sumedh 10y ago
  > or those successful investors are just the lucky ones Buffett directly answers this question http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....
- hohenheim 10y ago
  I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".
  - yodsanklai 10y ago
    He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!
- thebasuboy 10y ago
  Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run. I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right. That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.
scrrr 10y ago
Well, how many trades did he do? Is that number high enough to statistically determine if he is really more skilled than the average investor?
- soVeryTired 10y ago
  Even running a statistical test won't cut it. How could a statistical test account for the fact that an internet celebrity trader might be less likely to discuss his losing trades?
- sfifs 10y ago
  Actually, if I remember right, he said he bought ONLY when stock was under priced as per his analysis. A few big transactions a year vs. "trader" type frequent transactions.
xyzzy4 10y ago
If UPRO (s&p 500 leveraged 3x) had existed since the early 50s, it would've averaged about 20%-25% gains per year up until now. Warren Buffett also used leverage to invest.
deleted 10y ago
[deleted]
Nanite 10y ago
Also note his net worth increased even during recession times ,of which there were twelve during his lifetime so far, except for the 1974-1975 recession.
JumpCrisscross 10y ago
"We find that [Buffett's] alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management." http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...
- tim333 10y ago
  It can be easy with hindsight to say oh you should have just done Betting-Against-Beta and Quality-Minus-Junk. It doesn't mean those strategies are going to win over the next decades.
- ethanbond 10y ago
  Oh so all you've gotta do is pick cheap, safe, quality stocks. Got it.
  - oli5679 10y ago
    Low beta just means low historic correlation with market returns. It can be computed mechanically with no subjective judgement needed https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model If you had invested in low beta stocks, leveraged at the same level as Buffett you would not have performed much worse.

yodsanklai 10y ago

Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI https://www.youtube.com/watch?v=ARrNYyJEnFI and I've been pondering this efficiency hypothesis. Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision. What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea). I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.

svantana 10y ago
It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)? 1. http://blogmaverick.com/2013/01/10/the-stock-market-2/ http://blogmaverick.com/2013/01/10/the-stock-market-2/
- freyr 10y ago
  He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.
Marazan 10y ago
The market is irrational but it can stay irrational longer than you can stay solvent.
enibundo 10y ago
You misspelled that asshole's name. Find another teacher.
- Shanea93 10y ago
  I'm not really sure you understand the situation. A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition. The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid. The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis. They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills. When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same. Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive. You should really investigate the situation fully before blindly believing the story the media has sold to you.
  - lotsofpulp 10y ago
    How can nothing change for the end user? If the insurance company is picking up the tab, then the cost of insurance has to rise and/or the insurance benefits have to be cut (i.e. drug is no longer covered or co pay rises).
    - Shanea93 10y ago
      Well, the good thing about Daraprim, the drug for toxoplasmosis, is that it completely cures you of the condition. So sure, your insurance will rise because you made a claim, but it won't raise that much, since you don't have any medical conditions going forward. Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.
sumedh 10y ago
> or those successful investors are just the lucky ones Buffett directly answers this question http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....
hohenheim 10y ago
I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".
- yodsanklai 10y ago
  He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!
thebasuboy 10y ago
Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run. I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right. That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.

scrrr 10y ago

Well, how many trades did he do? Is that number high enough to statistically determine if he is really more skilled than the average investor?

soVeryTired 10y ago
Even running a statistical test won't cut it. How could a statistical test account for the fact that an internet celebrity trader might be less likely to discuss his losing trades?
sfifs 10y ago
Actually, if I remember right, he said he bought ONLY when stock was under priced as per his analysis. A few big transactions a year vs. "trader" type frequent transactions.

xyzzy4 10y ago

If UPRO (s&p 500 leveraged 3x) had existed since the early 50s, it would've averaged about 20%-25% gains per year up until now. Warren Buffett also used leverage to invest.

deleted 10y ago

[deleted]

Nanite 10y ago

Also note his net worth increased even during recession times ,of which there were twelve during his lifetime so far, except for the 1974-1975 recession.

JumpCrisscross 10y ago

"We find that [Buffett's] alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management." http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...

tim333 10y ago
It can be easy with hindsight to say oh you should have just done Betting-Against-Beta and Quality-Minus-Junk. It doesn't mean those strategies are going to win over the next decades.
ethanbond 10y ago
Oh so all you've gotta do is pick cheap, safe, quality stocks. Got it.
- oli5679 10y ago
  Low beta just means low historic correlation with market returns. It can be computed mechanically with no subjective judgement needed https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model If you had invested in low beta stocks, leveraged at the same level as Buffett you would not have performed much worse.