5 ms·

The Dumbest Thing I've Heard Warren Buffet Say

51 points by epi0Bauqu 19y ago

byrneseyeview 19y ago
I had exactly the same reaction when I got to that part of the letter. I think you can take any trend and extrapolate it into incredulity -- Buffett's career is certainly evidence of this.
- kingkongrevenge 19y ago
  This "1900 to 2000" trend people are extrapolating from is a myth. Stocks, as a broad category, have historically not been a great investment. Almost all the gain in that period happened in the last 20 years. If you break equity returns down into all possible 40 year periods returns were lousy. This is taking the index numbers at face value. Better assessments of returns using good inflation numbers and incorporating tax liabilities make the picture much worse. http://www.itulip.com/realdow.htm http://www.itulip.com/realdow.htm Finally, the real sample size goes back much farther than 1900. We have good equity price data back into the 18th century. 80% market crashes were common. Overall returns were not good. Stocks were cheap in 1980. Then they soared in price for 20 years. Now people are slow to realize that period was exceptional. Investing is about "buy low, sell high" not "stick your money in stocks." Stocks are high. The smart money bought commodities in the early 70s, changed to bonds in the early 80s, changed to stocks in the early 90s, and changed back to commodities in the early 2000s. That smart investor has absolutely crushed an equity fixated investor. This isn't rocket science, either. It's not that hard to review asset classes once a decade and figure out what's very cheap and what's expensive.
  - epi0Bauqu 19y ago
    So then what do you think the smart investor should put their money in now?
    - suboptimal 19y ago
      I don't know what an investor should do--I just watch the money move. Money will always flow somewhere, because it has to. Where will it flow next? Probably wherever it isn't this time. Right now commodities (a.k.a. "stuff") is getting the attention, as some have predicted for years (someone's always predicting something for years, until it comes true). Recently: Tech -> Housing -> Stuff -> ? A problem for people with money to worry about. ;)
    - nazgulnarsil 19y ago
      this question is why the financial institutions exist. companies that do nothing but solicit your money and invest it for you while living off a percentage don't really know all that much about how the markets work. Like the previous poster said, you have to be a contrarian. It's exactly that ability to invest in something when everyone thinks it is worthless that makes people rich. stocks were dirt cheap in the 80's, commodities were dirt cheap in the early 2000's, you have to figure out on your own where to go next. I will say that these trends seem to have followed a 17 year period (on average) during the 20th century. If this remains true america has another 9 years of slow economic growth (and commodities have another 9 years of bull). But we must always beware of the induction fallacy :)
admoin 19y ago
I think there are two sides to what Warren Buffett is saying. One side is nonsense, I agree - that he can make a prediction like that based on early trends. The other side, however, which is what I think he actually meant, is that, in fact, predicting from trends is not nearly what it's cracked up to be, and that there is no real guarantee of continued healthy returns from US equities, or even long-term returns to capital that are comparable to the low double-digit returns of the 20th Century. That's a legitimate point.
- wanorris 19y ago
  It is utterly reasonable to argue that past returns are no guarantee of future returns, but if that is the argument he meant to make, he did it exceedingly poorly.
  - admoin 19y ago
    I think he was trying to spin it in a folksy way, but ended up dumbing it down to the point that it came across as a weak argument.
bridgetroll 19y ago
Vizzini: BRK.A at $133,000 a share, Inconceivable! Inigo Montoya: You keep using that word. I do not think it means, what you think it means.
webwright 19y ago
So, on a related note... Google has grown really fast over 5 or so years. Say, 12,385% for the sake of argument. What do you think the chances of this experiencing that PERCENTAGE growth over the next 5 years? I think his point is-- high percentage growth is easy for small things. It gets harder for big things. Growth curves tend to flatten out.
- neilc 19y ago
  The DJIA is not a single "thing" that is subject to the same growth rules as a single organization -- it is just an index of companies. The same properties that allowed the index to grow from 66 to ~11,000 in the 20th century could just as easily allow it to grow by a similar percentage in the 21st century: the absolute value of the index is not relevant (it already accounts for stock splits).
  - webwright 19y ago
    Well, all "things" are made up of smaller "things"... Because the DJ is made up of smaller things, it's not subject to any growth rules? I'm not sure why you'd draw a line there. The question that Buffett is addressing is, "Is there as much potential for growth among these companies (and the economy as a whole) as there was 100 years ago?" His answer is no. While I'm not convinced, I don't think it's a "dumb" conclusion.
    - epi0Bauqu 19y ago
      I didn't say it was a dumb conclusion, but just that the particular argument made to support it was dumb. In particular, I qualified with Now there may be reasons not to expect similar returns in this century as compared to the last, but this is certainly not one of them. and This is not a discussion about whether we are actually in for similar, higher, or lower returns.
    - neilc 19y ago
      There may well be reason to conclude that there is less potential for growth -- the problem is that his reasoning for making that conclusion is based on the absolute value of the Dow index, which is what is dumb.
andreyf 19y ago
Could it be that he's fibbing, knowing that his words will affect the market in some way or another?
nradov 19y ago
I think I know what Warren Buffet was trying to say. There has been an equity premium in the capital markets for a long, long time. Stocks have tended to return more than most other asset classes even after adjusting for risk. That equity premium remained in place for so long because most investors didn't even realize that it was there; essentially they thought that stocks would be more risky than they really turned out to be. Now that the equity premium is more widely recognized and understood, traders have mostly arbitraged it away. So if present trends continue for the next 92 years then stocks may not return much more than bonds, real estate, commodities, etc. (At least not after you adjust for the actual risk.) http://en.wikipedia.org/wiki/Equity_premium_puzzle http://en.wikipedia.org/wiki/Equity_premium_puzzle
- jdroid 19y ago
  I work in finance. This is well put. :)
  - bkmrkr 19y ago
    hey, can you email me?
    - jdroid 19y ago
      I need your email address...
- epi0Bauqu 19y ago
  This is an interesting area of study, but I don't see how it concludes that bonds should do as well as stocks if the premium is truly arbitraged away. That is, if the premium is really gone, then it seems one should still expect stocks to do better than bonds because they make up a faster part of the economy’s growth curve relative to bonds. Yes, they are riskier investments. But that is why you buy and hold them for the whole century (or at least as long as you can so the day to day risk smooths out a bit).
  - nradov 19y ago
hobbs 19y ago
Who says you have to invest in Dow Jones' market during the 21st century? I'm sure it wouldn't be hard to get a 5.3% return in a more emerging market like, say, India or China.
- epi0Bauqu 19y ago
  An investor who wants the most return with the lowest risk will have a balanced portfolio across many asset classes, which would include both the Dow stocks and India and China in some fashion. That being said, the Dow companies already get a significant % of their earnings abroad. And this % is increasing.
  - hobbs 19y ago
    Don't get me wrong, I completely agree with the original author. Warren's logic is circular and seems to be preying on people's inability to conceive of very large numbers. I'd fully expect DJIA to continue growing at roughly the same pace this century as the last. Even if it doesn't, though, everyone knows that the trick to successful investment is to buy low and sell high. There are still plenty of opportunities to buy low - even with limited risk - in large emerging economies. The U.S. may become a low-risk capital preservation stock and China will become the higher-risk investment stock.
- nradov 19y ago
  Actually it will be hard to get that kind of return in emerging market stocks for three reasons. 1) Emerging markets tend to be riskier, so if you look at it on a risk-adjusted basis the expected returns don't look as good. What happens to your assets if China has another revolution? 2) As a practical matter, an individual US citizen just can't buy equity in many emerging market companies. Either they aren't listed on US exchanges, or are privately held, or national goverments have ownership restrictions in place. There isn't even much in the way of mutual funds to do it indirectly. 3) The few stocks in the BRIC markets available for direct purchase by individual outside investors have already been bid up to ridiculous levels by dumb money who think they can't afford to be left behind. You may be waiting a very long time to see much significant upside.
rksprst 19y ago
Looking at this thread, I think it would be very useful to link comments on news.yc to disqus (so they show up on the blog post). I'm sure the disqus guys can do that.
mynameishere 19y ago
It could easily happen, but only if things get very, very bad. http://mises.org/story/2532 http://mises.org/story/2532
bkmrkr 19y ago
Einstein did say compound interest is the 8th wonder of the world.
etal 19y ago
The point wasn't that 2 million is a huge number, but that 5.3% is just as huge. The millions are the eye-catching part, but this looks like an odd way of saying a risk-adjusted 5% return is insane, and 10% (the target for a '90s-era portfolio) is not twice but ten times as insane, in the long run.
t0pj 19y ago
"Beware the glib helper who fills your head with fantasies while he fills his pockets with fees." Timeless WB wisdom.
nazgulnarsil 19y ago
everyone says dumb things. warren buffet says less dumb things than the average person by several orders of magnitude. I'm willing to forgive him the occasional brain fart.

51 points by epi0Bauqu 19y ago

I had exactly the same reaction when I got to that part of the letter. I think you can take any trend and extrapolate it into incredulity -- Buffett's career is certainly evidence of this.

kingkongrevenge 19y ago
This "1900 to 2000" trend people are extrapolating from is a myth. Stocks, as a broad category, have historically not been a great investment. Almost all the gain in that period happened in the last 20 years. If you break equity returns down into all possible 40 year periods returns were lousy. This is taking the index numbers at face value. Better assessments of returns using good inflation numbers and incorporating tax liabilities make the picture much worse. http://www.itulip.com/realdow.htm http://www.itulip.com/realdow.htm Finally, the real sample size goes back much farther than 1900. We have good equity price data back into the 18th century. 80% market crashes were common. Overall returns were not good. Stocks were cheap in 1980. Then they soared in price for 20 years. Now people are slow to realize that period was exceptional. Investing is about "buy low, sell high" not "stick your money in stocks." Stocks are high. The smart money bought commodities in the early 70s, changed to bonds in the early 80s, changed to stocks in the early 90s, and changed back to commodities in the early 2000s. That smart investor has absolutely crushed an equity fixated investor. This isn't rocket science, either. It's not that hard to review asset classes once a decade and figure out what's very cheap and what's expensive.
- epi0Bauqu 19y ago
  So then what do you think the smart investor should put their money in now?
  - suboptimal 19y ago
    I don't know what an investor should do--I just watch the money move. Money will always flow somewhere, because it has to. Where will it flow next? Probably wherever it isn't this time. Right now commodities (a.k.a. "stuff") is getting the attention, as some have predicted for years (someone's always predicting something for years, until it comes true). Recently: Tech -> Housing -> Stuff -> ? A problem for people with money to worry about. ;)
  - nazgulnarsil 19y ago
    this question is why the financial institutions exist. companies that do nothing but solicit your money and invest it for you while living off a percentage don't really know all that much about how the markets work. Like the previous poster said, you have to be a contrarian. It's exactly that ability to invest in something when everyone thinks it is worthless that makes people rich. stocks were dirt cheap in the 80's, commodities were dirt cheap in the early 2000's, you have to figure out on your own where to go next. I will say that these trends seem to have followed a 17 year period (on average) during the 20th century. If this remains true america has another 9 years of slow economic growth (and commodities have another 9 years of bull). But we must always beware of the induction fallacy :)

admoin 19y ago

I think there are two sides to what Warren Buffett is saying. One side is nonsense, I agree - that he can make a prediction like that based on early trends. The other side, however, which is what I think he actually meant, is that, in fact, predicting from trends is not nearly what it's cracked up to be, and that there is no real guarantee of continued healthy returns from US equities, or even long-term returns to capital that are comparable to the low double-digit returns of the 20th Century. That's a legitimate point.

wanorris 19y ago
It is utterly reasonable to argue that past returns are no guarantee of future returns, but if that is the argument he meant to make, he did it exceedingly poorly.
- admoin 19y ago
  I think he was trying to spin it in a folksy way, but ended up dumbing it down to the point that it came across as a weak argument.

bridgetroll 19y ago

Vizzini: BRK.A at $133,000 a share, Inconceivable! Inigo Montoya: You keep using that word. I do not think it means, what you think it means.

webwright 19y ago

So, on a related note... Google has grown really fast over 5 or so years. Say, 12,385% for the sake of argument. What do you think the chances of this experiencing that PERCENTAGE growth over the next 5 years? I think his point is-- high percentage growth is easy for small things. It gets harder for big things. Growth curves tend to flatten out.

neilc 19y ago
The DJIA is not a single "thing" that is subject to the same growth rules as a single organization -- it is just an index of companies. The same properties that allowed the index to grow from 66 to ~11,000 in the 20th century could just as easily allow it to grow by a similar percentage in the 21st century: the absolute value of the index is not relevant (it already accounts for stock splits).
- webwright 19y ago
  Well, all "things" are made up of smaller "things"... Because the DJ is made up of smaller things, it's not subject to any growth rules? I'm not sure why you'd draw a line there. The question that Buffett is addressing is, "Is there as much potential for growth among these companies (and the economy as a whole) as there was 100 years ago?" His answer is no. While I'm not convinced, I don't think it's a "dumb" conclusion.
  - epi0Bauqu 19y ago
    I didn't say it was a dumb conclusion, but just that the particular argument made to support it was dumb. In particular, I qualified with Now there may be reasons not to expect similar returns in this century as compared to the last, but this is certainly not one of them. and This is not a discussion about whether we are actually in for similar, higher, or lower returns.
  - neilc 19y ago
    There may well be reason to conclude that there is less potential for growth -- the problem is that his reasoning for making that conclusion is based on the absolute value of the Dow index, which is what is dumb.

andreyf 19y ago

Could it be that he's fibbing, knowing that his words will affect the market in some way or another?

nradov 19y ago

I think I know what Warren Buffet was trying to say. There has been an equity premium in the capital markets for a long, long time. Stocks have tended to return more than most other asset classes even after adjusting for risk. That equity premium remained in place for so long because most investors didn't even realize that it was there; essentially they thought that stocks would be more risky than they really turned out to be. Now that the equity premium is more widely recognized and understood, traders have mostly arbitraged it away. So if present trends continue for the next 92 years then stocks may not return much more than bonds, real estate, commodities, etc. (At least not after you adjust for the actual risk.) http://en.wikipedia.org/wiki/Equity_premium_puzzle http://en.wikipedia.org/wiki/Equity_premium_puzzle

jdroid 19y ago
I work in finance. This is well put. :)
- bkmrkr 19y ago
  hey, can you email me?
  - jdroid 19y ago
    I need your email address...
epi0Bauqu 19y ago
This is an interesting area of study, but I don't see how it concludes that bonds should do as well as stocks if the premium is truly arbitraged away. That is, if the premium is really gone, then it seems one should still expect stocks to do better than bonds because they make up a faster part of the economy’s growth curve relative to bonds. Yes, they are riskier investments. But that is why you buy and hold them for the whole century (or at least as long as you can so the day to day risk smooths out a bit).
- nradov 19y ago

hobbs 19y ago

Who says you have to invest in Dow Jones' market during the 21st century? I'm sure it wouldn't be hard to get a 5.3% return in a more emerging market like, say, India or China.

epi0Bauqu 19y ago
An investor who wants the most return with the lowest risk will have a balanced portfolio across many asset classes, which would include both the Dow stocks and India and China in some fashion. That being said, the Dow companies already get a significant % of their earnings abroad. And this % is increasing.
- hobbs 19y ago
  Don't get me wrong, I completely agree with the original author. Warren's logic is circular and seems to be preying on people's inability to conceive of very large numbers. I'd fully expect DJIA to continue growing at roughly the same pace this century as the last. Even if it doesn't, though, everyone knows that the trick to successful investment is to buy low and sell high. There are still plenty of opportunities to buy low - even with limited risk - in large emerging economies. The U.S. may become a low-risk capital preservation stock and China will become the higher-risk investment stock.
nradov 19y ago
Actually it will be hard to get that kind of return in emerging market stocks for three reasons. 1) Emerging markets tend to be riskier, so if you look at it on a risk-adjusted basis the expected returns don't look as good. What happens to your assets if China has another revolution? 2) As a practical matter, an individual US citizen just can't buy equity in many emerging market companies. Either they aren't listed on US exchanges, or are privately held, or national goverments have ownership restrictions in place. There isn't even much in the way of mutual funds to do it indirectly. 3) The few stocks in the BRIC markets available for direct purchase by individual outside investors have already been bid up to ridiculous levels by dumb money who think they can't afford to be left behind. You may be waiting a very long time to see much significant upside.

rksprst 19y ago

Looking at this thread, I think it would be very useful to link comments on news.yc to disqus (so they show up on the blog post). I'm sure the disqus guys can do that.

mynameishere 19y ago

It could easily happen, but only if things get very, very bad. http://mises.org/story/2532 http://mises.org/story/2532

bkmrkr 19y ago

Einstein did say compound interest is the 8th wonder of the world.

etal 19y ago

The point wasn't that 2 million is a huge number, but that 5.3% is just as huge. The millions are the eye-catching part, but this looks like an odd way of saying a risk-adjusted 5% return is insane, and 10% (the target for a '90s-era portfolio) is not twice but ten times as insane, in the long run.

t0pj 19y ago

"Beware the glib helper who fills your head with fantasies while he fills his pockets with fees." Timeless WB wisdom.

nazgulnarsil 19y ago

everyone says dumb things. warren buffet says less dumb things than the average person by several orders of magnitude. I'm willing to forgive him the occasional brain fart.