5 ms·

I wonder to what extent Warren Buffet is Warren Buffet because of how he thinks and acts (like all of these non-fiction authors selling books by using his name

I wonder to what extent Warren Buffet is Warren Buffet because of how he thinks and acts (like all of these non-fiction authors selling books by using his name would have us believe), and to what extent he is the product of media selection bias. -- If you take a large enough group of people who take risky stakes that are large enough (like the world of financial asset management), then one of them is bound to be as successful as Warren Buffet, even if they all behave randomly.

cm2187 8y ago
Except that he has been consistently successful over a very long period, unlike, say a Paulson who one could claim got lucky in 2008.
- stakhanov 8y ago
  A thought experiment: Say I have a database with 1024 e-mail addresses. I split them in two groups. I send an e-mail to 512 of them saying "tomorrow, IBM is going to go up". To the other 512, I send an e-mail saying "tomorrow, IBM is going to go down". The next day, IBM is up, and I discard from my database the 512 people to whom I've just sent an incorrect stock tip. Then I repeat. I send an e-mail to 256 people saying "tomorrow, Microsoft is going to go up", and so forth. ...at the end of the process I have someone who I've just sent 10 correct stock tips to. -- From the point of view of that person, I have been CONSISTENTLY successful. So that doesn't really mean anything. Also: There is a saying: You only have to get rich once. It is much easier, if you come into money at one point in your life, to hold on to it, than it is to repeatedly go from zero to hero, since capital has a tendency to create more capital, and a lack of capital has a tendency to prevent you from accumulating any. I know it goes against the mindset of the American entrepreneurially-minded crowd here. But it's a thought.
  - dwighttk 8y ago
    Except Buffet has been emailing everyone every year since 1962; unless he has a way to pick branching timelines.
    - nicoburns 8y ago
      > unless he has a way to pick branching timelines. Now that would be a skill that would set you up for success!
  - q-base 8y ago
    Fun thought experiment. Made me smile even though the direct relation to Buffet perhaps is a little vague. But your second saying about only getting rich once is probably closer to the truth.
  - sokoloff 8y ago
    You can use the "[private] tournament winner" selection process up to a certain point, but at some point far below Warren Buffett's current level, you come into the public eye. If it were akin to flipping coins, we'd almost surely have seen 16+ proto-Buffetts emerge into public consciousness only to see 15 of them blow up. Sure, there have been hedge fund failures and you could argue that Madoff was a public eye super-investor who turned out to fail, but I don't think there are enough examples of "this guy is a genius based on his track record" turning into "that guy we thought was a genius turned out to just be a lucky idiot" to suggest that all of Buffett's returns are luck.
  - Sholmesy 8y ago
    Derren Brown did exactly this with horse racing: https://www.youtube.com/watch?v=9R5OWh7luL4 https://www.youtube.com/watch?v=9R5OWh7luL4
- boombust 8y ago
  While you are right, I think the parent's idea if that with a large enough sample, even if every actor is making decisions randomly, you will get actors that will just crush it. I mean Warren Buffet invested in Apple about a year ago based on the idea that they have a sticky brand and went so far as to say that iPhones were underpriced (which is just flat out wrong given how poorly they sold relative to predictions). . .and it turned out to be a terrible investment decision (so far). While I find it hard to believe that WB is all luck I think you can't dismiss that argument entirely based on his track record, no matter how successful.
  - stakhanov 8y ago
    Well, if you take the random-chance/selection-bias as the core of a snowball and add to it the various mechanisms which mean that the game of asset management is rigged in favour of the manager, then I think there is something to this. For example, asset managers get a part of their income from a MANAGEMENT fee which is a percentage of the assets under management, that they collect regardless of whether the fund actually does well. If you get a few bets right, make a name for yourself, more people will be putting money into your funds, and it all turns into a self-fulfilling prophecy.
  - hopler 8y ago
    Buffet also refused to invest in computer/Internet companies for many years because he knew he didn't understand them.
  - smileysteve 8y ago
    On Apple; on a 1 year timeline APPL beats the S&P 500 by 5%. But I don't think Buffett measures his investments on a 1 year timeline; and to be honest to your comment, he made the underpriced comment on Aug 31, 6 months ago. "I do not focus on the sales in the next quarter or the next year," he said. "I focus on the ... hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone]." Apple does continue to boost services income, keep cash on hand, pay dividends, and do share buybacks, all with a P/E below major utility stocks -- things Buffett traditionally considers. Disclaimer. Apple Shareholder
ancorevard 8y ago
There is such a thing as information, knowledge, wisdom and finally free will. Warren Buffet is Warren Buffet because of the way he consumed the information available to him, interpreted it and finally reacted to it. Certainly, Warren does not control the many factors in the environments he found himself in, factors that was favorable for him to get to where he is today and factors that were obstacles to him. But his chosen actions are his, the paths he took, the burdens, the risks, and the responsibilities. I would perhaps think of him as wise, not a genius or any such worship nonsense.
- knightofmars 8y ago
  >There is such a thing as information, knowledge, wisdom and finally free will. The prevailing theories of today are that "free will" isn't so real. https://www.psychologytoday.com/us/blog/sapient-nature/201205/free-will-is-illusion-so-what https://www.psychologytoday.com/us/blog/sapient-nature/20120...
lelima 8y ago
People like him, are made by many, many random acts, and of course dedication, around 10.000 hours is need it for be an expert in any field, any. What if "grandfather who was a grocer" was a plumber instead? I Strongly recommend this book: Outliers by Malcolm Gladwell. He studies outliers, their family, culture, timing. One of many fun facts is that almost every pro-hockey player in Canada is born in the early's month jan, feb, mar. Why? they compete versus small children when their are kids, and those months of strength give them advantage, which sent them into better teams, with better coaches and so on..
- kiba 8y ago
  I wouldn't recommend any books by Malcolm Gladwell. He oversimplified things for the sake of telling stories. If you want to learn rigorously, better look toward academic sources.
  - lelima 8y ago
    Which academic sources would you recommend on this topic? I've checked the sources from that book and they seem legit, including papers and articles[1]. Besides, the reviews of that book are very positive [2]. [1]: http://guides.skylinecollege.edu/c.php?g=279172&p=1861295 http://guides.skylinecollege.edu/c.php?g=279172&p=1861295 [2]: https://www.amazon.co.uk/Outliers-Story-Success-Malcolm-Gladwell-ebook/dp/B002RI9PKO https://www.amazon.co.uk/Outliers-Story-Success-Malcolm-Glad...
    - kiba 8y ago
      My recommendation is to read the academic sources, not the guy who simplified materials to an extent that things are lost in the translation leading to misrepresentation and misunderstanding. Also, always read the negative reviews. Sometime, they are bunk, but they sometime can be very informative.
      - donaldknuth123 8y ago
        Most of the negative comments are like yours, some version of: "This book is so simple anyone could have written it!" Hardly insightful.
doktrin 8y ago
The key to me, it seems, would be to evaluate his decision making process as opposed to merely examining the outcome. If the stated rationale used at the outset is validated (repeatedly), then it stands to reason his success is due to more than simply being lucky. I'm not very familiar with Warren Buffet or the world he operates in, but my understanding is that he does not in fact take particularly risky stakes and explicitly stays away from verticals he's not familiar with. Hence my personal opinion would be that how he "thinks and acts" has directly contributed to his success - but happy to be proven wrong.
Brigadirk 8y ago
I can't find the quote, but Buffett himself addresses this somewhere by saying that while you can get very lucky in finance, if the lucky ones all come from a particular city (Omaha) with a particular philosophy, something might be up.
- melling 8y ago
  He’s talking about value investing. The markets are supposed to be efficient and you can’t beat them.
  - throwawaymath 8y ago
    Indeed, they're supposed to be.
samsepia 8y ago
If they all behaved purely randomly WB would be a high sigma event - he's got to be loaded in some way - the issue here is which of WB's properties are behind his financial success - one strategy would be to emulate him as accurately as possible in all his idiosyncrasies or to use a more scientific method (e.g. looking at common traits among agents of his class).
senthil_rajasek 8y ago
Buffett shows how investors like him are not random in this lecture, https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham...
dwighttk 8y ago
Not over the time period he has been successful. Or at least the longer he lasts as a successful person doing what he does the less likely he's just acting at random. It's possible to get 1000000 heads in a row flipping a fair coin, but around 20 I'm going to be suspicious. edit: With Buffet, he's not actually getting everything right, so I guess a better metaphor would be like 70% heads over 1000000 flips... more likely under random circumstances, but still pretty suspicious.
- T-hawk 8y ago
  > but around 20 I'm going to be suspicious. There's a multiple-endpoints effect here. If there are 2^20 participants all doing that, one of them is going to flip 20 heads in a row. You only notice the one who did after the fact. Some participant has to be the most outlying result and that's the only one you notice. (Not that that's necessarily the case for Buffett, but that's a general fallacy to be aware of.)
  - dwighttk 8y ago
    Yeah, I'd be less suspicious of 20 in a row out of a group of 1000000 flippers. But if any of them got 70% of 1000000 flips I'd be suspicious.
bgroat 8y ago
Funnily enough, Buffett actually calculated this in his essay "The Super Investors of Graham and Doddsville" Basically, advocates of the Free Market Hypotheses believed that it was impossible for anyone to deliberately, repeatedly generate alpha. The market was rational, and success was probabilistically distributed. With a large enough population, you will get Buffett level returns - therefor Buffett is a fluke. However, Buffett calculated that there weren't enough investors for his success to be a factor of random distribution, plus there were 2 dozen others who followed a similar strategy who also consistently generate alpha
- hyperpape 8y ago
  I think you mean "efficient-market hypothesis".
- throwawaymath 8y ago
  It's worth noting that Fama has since then walked back on the strong statement of the Efficient Market Hypothesis. I don't know that he ever intended to say beating the market is impossible; rather that beating the market must be impossible, under the rigorously definition of an idealized, "efficient" market. Unfortunately a lot of proponents of the EMH (especially non-academics) have taken this concept and run with it in ways Fama didn't intend. His position would be more accurately stated as the claim that modern markets are eventually informationally efficient, for any given instance of information asymmetry. It's a useful model that approximates markets, not an empirical claim about the world.
  - rbavocadotree 8y ago
    He definitely never said that beating the market is impossible. He said you can beat the market long term by taking on more risk, but not by market timing and stock selection. Everyone leaves out risk when talking about the EMH.
- westurner 8y ago
  "The Superinvestors of Graham and Doddsville" (1984) https://scholar.google.com/scholar?cluster=17265410477248371217&hl=en&as_sdt=5,43&sciodt=0,43 https://scholar.google.com/scholar?cluster=17265410477248371... From https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a... : > The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index.

cm2187 8y ago

Except that he has been consistently successful over a very long period, unlike, say a Paulson who one could claim got lucky in 2008.

stakhanov 8y ago
A thought experiment: Say I have a database with 1024 e-mail addresses. I split them in two groups. I send an e-mail to 512 of them saying "tomorrow, IBM is going to go up". To the other 512, I send an e-mail saying "tomorrow, IBM is going to go down". The next day, IBM is up, and I discard from my database the 512 people to whom I've just sent an incorrect stock tip. Then I repeat. I send an e-mail to 256 people saying "tomorrow, Microsoft is going to go up", and so forth. ...at the end of the process I have someone who I've just sent 10 correct stock tips to. -- From the point of view of that person, I have been CONSISTENTLY successful. So that doesn't really mean anything. Also: There is a saying: You only have to get rich once. It is much easier, if you come into money at one point in your life, to hold on to it, than it is to repeatedly go from zero to hero, since capital has a tendency to create more capital, and a lack of capital has a tendency to prevent you from accumulating any. I know it goes against the mindset of the American entrepreneurially-minded crowd here. But it's a thought.
- dwighttk 8y ago
  Except Buffet has been emailing everyone every year since 1962; unless he has a way to pick branching timelines.
  - nicoburns 8y ago
    > unless he has a way to pick branching timelines. Now that would be a skill that would set you up for success!
- q-base 8y ago
  Fun thought experiment. Made me smile even though the direct relation to Buffet perhaps is a little vague. But your second saying about only getting rich once is probably closer to the truth.
- sokoloff 8y ago
  You can use the "[private] tournament winner" selection process up to a certain point, but at some point far below Warren Buffett's current level, you come into the public eye. If it were akin to flipping coins, we'd almost surely have seen 16+ proto-Buffetts emerge into public consciousness only to see 15 of them blow up. Sure, there have been hedge fund failures and you could argue that Madoff was a public eye super-investor who turned out to fail, but I don't think there are enough examples of "this guy is a genius based on his track record" turning into "that guy we thought was a genius turned out to just be a lucky idiot" to suggest that all of Buffett's returns are luck.
- Sholmesy 8y ago
  Derren Brown did exactly this with horse racing: https://www.youtube.com/watch?v=9R5OWh7luL4 https://www.youtube.com/watch?v=9R5OWh7luL4
boombust 8y ago
While you are right, I think the parent's idea if that with a large enough sample, even if every actor is making decisions randomly, you will get actors that will just crush it. I mean Warren Buffet invested in Apple about a year ago based on the idea that they have a sticky brand and went so far as to say that iPhones were underpriced (which is just flat out wrong given how poorly they sold relative to predictions). . .and it turned out to be a terrible investment decision (so far). While I find it hard to believe that WB is all luck I think you can't dismiss that argument entirely based on his track record, no matter how successful.
- stakhanov 8y ago
  Well, if you take the random-chance/selection-bias as the core of a snowball and add to it the various mechanisms which mean that the game of asset management is rigged in favour of the manager, then I think there is something to this. For example, asset managers get a part of their income from a MANAGEMENT fee which is a percentage of the assets under management, that they collect regardless of whether the fund actually does well. If you get a few bets right, make a name for yourself, more people will be putting money into your funds, and it all turns into a self-fulfilling prophecy.
- hopler 8y ago
  Buffet also refused to invest in computer/Internet companies for many years because he knew he didn't understand them.
- smileysteve 8y ago
  On Apple; on a 1 year timeline APPL beats the S&P 500 by 5%. But I don't think Buffett measures his investments on a 1 year timeline; and to be honest to your comment, he made the underpriced comment on Aug 31, 6 months ago. "I do not focus on the sales in the next quarter or the next year," he said. "I focus on the ... hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone]." Apple does continue to boost services income, keep cash on hand, pay dividends, and do share buybacks, all with a P/E below major utility stocks -- things Buffett traditionally considers. Disclaimer. Apple Shareholder

ancorevard 8y ago

There is such a thing as information, knowledge, wisdom and finally free will. Warren Buffet is Warren Buffet because of the way he consumed the information available to him, interpreted it and finally reacted to it. Certainly, Warren does not control the many factors in the environments he found himself in, factors that was favorable for him to get to where he is today and factors that were obstacles to him. But his chosen actions are his, the paths he took, the burdens, the risks, and the responsibilities. I would perhaps think of him as wise, not a genius or any such worship nonsense.

knightofmars 8y ago
>There is such a thing as information, knowledge, wisdom and finally free will. The prevailing theories of today are that "free will" isn't so real. https://www.psychologytoday.com/us/blog/sapient-nature/201205/free-will-is-illusion-so-what https://www.psychologytoday.com/us/blog/sapient-nature/20120...

lelima 8y ago

People like him, are made by many, many random acts, and of course dedication, around 10.000 hours is need it for be an expert in any field, any. What if "grandfather who was a grocer" was a plumber instead? I Strongly recommend this book: Outliers by Malcolm Gladwell. He studies outliers, their family, culture, timing. One of many fun facts is that almost every pro-hockey player in Canada is born in the early's month jan, feb, mar. Why? they compete versus small children when their are kids, and those months of strength give them advantage, which sent them into better teams, with better coaches and so on..

kiba 8y ago
I wouldn't recommend any books by Malcolm Gladwell. He oversimplified things for the sake of telling stories. If you want to learn rigorously, better look toward academic sources.
- lelima 8y ago
  Which academic sources would you recommend on this topic? I've checked the sources from that book and they seem legit, including papers and articles[1]. Besides, the reviews of that book are very positive [2]. [1]: http://guides.skylinecollege.edu/c.php?g=279172&p=1861295 http://guides.skylinecollege.edu/c.php?g=279172&p=1861295 [2]: https://www.amazon.co.uk/Outliers-Story-Success-Malcolm-Gladwell-ebook/dp/B002RI9PKO https://www.amazon.co.uk/Outliers-Story-Success-Malcolm-Glad...
  - kiba 8y ago
    My recommendation is to read the academic sources, not the guy who simplified materials to an extent that things are lost in the translation leading to misrepresentation and misunderstanding. Also, always read the negative reviews. Sometime, they are bunk, but they sometime can be very informative.
    - donaldknuth123 8y ago
      Most of the negative comments are like yours, some version of: "This book is so simple anyone could have written it!" Hardly insightful.

doktrin 8y ago

The key to me, it seems, would be to evaluate his decision making process as opposed to merely examining the outcome. If the stated rationale used at the outset is validated (repeatedly), then it stands to reason his success is due to more than simply being lucky. I'm not very familiar with Warren Buffet or the world he operates in, but my understanding is that he does not in fact take particularly risky stakes and explicitly stays away from verticals he's not familiar with. Hence my personal opinion would be that how he "thinks and acts" has directly contributed to his success - but happy to be proven wrong.

Brigadirk 8y ago

I can't find the quote, but Buffett himself addresses this somewhere by saying that while you can get very lucky in finance, if the lucky ones all come from a particular city (Omaha) with a particular philosophy, something might be up.

melling 8y ago
He’s talking about value investing. The markets are supposed to be efficient and you can’t beat them.
- throwawaymath 8y ago
  Indeed, they're supposed to be.

samsepia 8y ago

If they all behaved purely randomly WB would be a high sigma event - he's got to be loaded in some way - the issue here is which of WB's properties are behind his financial success - one strategy would be to emulate him as accurately as possible in all his idiosyncrasies or to use a more scientific method (e.g. looking at common traits among agents of his class).

senthil_rajasek 8y ago

Buffett shows how investors like him are not random in this lecture, https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham...

dwighttk 8y ago

Not over the time period he has been successful. Or at least the longer he lasts as a successful person doing what he does the less likely he's just acting at random. It's possible to get 1000000 heads in a row flipping a fair coin, but around 20 I'm going to be suspicious. edit: With Buffet, he's not actually getting everything right, so I guess a better metaphor would be like 70% heads over 1000000 flips... more likely under random circumstances, but still pretty suspicious.

T-hawk 8y ago
> but around 20 I'm going to be suspicious. There's a multiple-endpoints effect here. If there are 2^20 participants all doing that, one of them is going to flip 20 heads in a row. You only notice the one who did after the fact. Some participant has to be the most outlying result and that's the only one you notice. (Not that that's necessarily the case for Buffett, but that's a general fallacy to be aware of.)
- dwighttk 8y ago
  Yeah, I'd be less suspicious of 20 in a row out of a group of 1000000 flippers. But if any of them got 70% of 1000000 flips I'd be suspicious.

bgroat 8y ago

Funnily enough, Buffett actually calculated this in his essay "The Super Investors of Graham and Doddsville" Basically, advocates of the Free Market Hypotheses believed that it was impossible for anyone to deliberately, repeatedly generate alpha. The market was rational, and success was probabilistically distributed. With a large enough population, you will get Buffett level returns - therefor Buffett is a fluke. However, Buffett calculated that there weren't enough investors for his success to be a factor of random distribution, plus there were 2 dozen others who followed a similar strategy who also consistently generate alpha

hyperpape 8y ago
I think you mean "efficient-market hypothesis".
throwawaymath 8y ago
It's worth noting that Fama has since then walked back on the strong statement of the Efficient Market Hypothesis. I don't know that he ever intended to say beating the market is impossible; rather that beating the market must be impossible, under the rigorously definition of an idealized, "efficient" market. Unfortunately a lot of proponents of the EMH (especially non-academics) have taken this concept and run with it in ways Fama didn't intend. His position would be more accurately stated as the claim that modern markets are eventually informationally efficient, for any given instance of information asymmetry. It's a useful model that approximates markets, not an empirical claim about the world.
- rbavocadotree 8y ago
  He definitely never said that beating the market is impossible. He said you can beat the market long term by taking on more risk, but not by market timing and stock selection. Everyone leaves out risk when talking about the EMH.
westurner 8y ago
"The Superinvestors of Graham and Doddsville" (1984) https://scholar.google.com/scholar?cluster=17265410477248371217&hl=en&as_sdt=5,43&sciodt=0,43 https://scholar.google.com/scholar?cluster=17265410477248371... From https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a... : > The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index.