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Warren Buffet: How to Minimize Investment Returns

29 points by smanek 18y ago

steveplace 18y ago
This subject is a serious hobby (approaching business) of mine so I'll comment. Warren Buffet is an investor, namely a value investor. And he does very well with his strategies. But there are other more speculative strategies that work and do provide greater annual returns than his company. The returns for certain strategies, however, diminish when you increase your capital for a certain strategy. There is a difference between what he does and financial speculation. W.B. actively goes out to seek and create value, whereas speculators are scalpers, not actually creating value but by exploiting market inefficiencies. There is also a difference between the value of a company and the supply and demand of the stock of that company. W.B. follows the former with the expectation that the latter will follow (it most often does). His last paragraph is probably the most interesting in this essay. It shows that past returns are certainly not indicative of the future. My guess is that U.S. domestic equities will not have the greatest return as a securities class for a while. See: http://bespokeinvest.typepad.com/bespoke/2008/06/shrinking-usa.html http://bespokeinvest.typepad.com/bespoke/2008/06/shrinking-u...
- gscott 18y ago
  Reading your comment, it made me think of Yahoo! and the "value" that is in Yahoo! but just isn't seen in it's stock price. Warren Buffet should buy Yahoo! and turn it into the company it should already be but for some reason, isn't.
  - steveplace 18y ago
    W.B. refuses to invest in internet companies. He feels that they are overvalued. And there is a difference between stock price and the value of a company. Of course, I also believe that the efficient market hypothesis is bullshit.
    - byrneseyeview 18y ago
      I though the argued that they were hard to understand, not intrinsically worth less than the price at which he could buy them.
- kingkongrevenge 18y ago
  > W.B. actively goes out to seek and create value I would dispute this. Berkshire Hathaway is essentially an insurance company. Look at revenues. Buffet relies on the peculiar accounting tricks of global insurance and his special relationships in the industry to line up unusual access to ultra-cheap capital at opportune times to seize value opportunities. Buffet is not just another billionaire investor with sharp analysis. He has a bag of special tricks and special relationships. He is just a speculator, not a value creator. The main point I took away is that speculation is a zero sum game, which is practically a truism. Getting returns above the general rate of growth requires outsmarting other investors and pocketing their losses. Total returns are constrained to the general growth rate. You are quite right that many people win at this zero sum game. Buffet seems to endorse the fraudulent popular idea that everyone can fund retirement from the stock market by sharing in the general rate of return. In reality the stock market has historically barely beat inflation and equities investing is really pretty much a straight-up zero sum game.
  - steveplace 18y ago
    BRK.A is a conglomeration. Over the past decade they have been in the insurance business (GEICO). But they have also been in other businesses, and I would say that you could consider them like a private equity firm. They would buy companies of good value and build them out. They did it with furniture retail. There is a difference between speculating and investing. Speculating is zero sum and about 80% of the people that trade will lose money. Buffet actually says that diversification is a good idea if you don't know what you're doing. If you can value companies properly then you can have returns greater than the market (beta-weighted). Investing is not zero sum. I'm not going to defend that, it just is. That being said, buy and hold is a dumb idea too. And equities historically beat inflation if you consider dividend payouts.
andrewparker 18y ago
Isn't this the pot calling the kettle black? Warren Buffet manages money on behalf of his investors via his investment vehicle: Berkshire Hathaway. He is a "Helper." Granted, he's a giant leap above the hedge fund world zero-sum game. But, he's still a stock picking "Helper."
- nostrademons 18y ago
  His incentive structure is different from the mainstream financial industry. Buffett invests his own money and doesn't sell his stock: he started the Buffett Partnership with $100K of his own savings. His gains or losses are proportionally equal to that of his investors. I guess maybe the original limited partners had it different (Buffett probably got a larger share of Berkshire for his $100k than the limited partners got), but I doubt any of them are complaining now. Investing in Berkshire Hathaway is "Heads we both win, tails we both lose. Hope you like betting the same way I do." By contrast, investing in a hedge fund is "Heads I win, tails you lose" and investing in a mutual fund is "Either way I win, tails you lose."
- RichardPrice 18y ago
  Andrew, I think that's a really good point about the pot calling the kettle black. It’s an assumption in Buffett’s argument that Helpers don’t create value; they just take a portion of the pie. This is a fine assumption to make in an imaginary world, but what it requires is that any opportunities that Helpers invest in, and which go on to create value, would have been spotted by the Gotrocks family. So the Helpers don’t spot any new opportunities; they merely charge for advice on investments that would have been made by the Gotrocks family anyway. How applicable is this assumption to the real world? In the real world, there is no such all-seeing Gotrocks family that spots every new business opportunity that arises, and allocates appropriate capital accordingly. If there had been no venture capitalists (who are one kind of Helper) to invest in Sergey Brin and Larry Page when they were starting Google, say, there is no real world Gotrocks family who would stepped in and invested in them. In the case of Google, the VCs did not just take a portion of the pie that would have been created anyway. The Helpers here are partly responsible for the value that Google created. The actual distinction between a Helper and a non-Helper is not very clear either. If a Helper is an allocator of capital, then all companies are Helpers. VCs allocate capital by buying chunks of companies that, they hope, will create value. Microsoft, say, allocates capital by hiring programmers who, they hope, will create value. Is it possible to draw a distinction between kinds of activities that are value-creating, and kinds that are not? It is hard to see how one could. Perhaps one could try to argue that the activity of buying chunks of companies (as VCs do) is inherently less value-creating than the activity of hiring programmers (as, say, Microsoft does). It doesn’t seem that this argument could work even in principle, as a company that hires programmers, for instance, will frequently pay for them with cash that they have raised from VCs. If the programmers hired by the company create value, the VC is partly responsibility for that. Buffett’s argument is beguilingly simple, and it took me a while to think through what its assumptions are. When you think it through, it really does look like the key assumption is that Helpers don’t create value. And it seems that this assumption could only be true in Buffett’s imagined world if all business opportunities invested in by the Helpers would have been invested in anyway by the Gotrocks. This is the point where Buffett’s model fails to apply to the real world; there is no real world counterpart of the Gotrocks that would find and invest in business opportunities if Helpers did not exist.

29 points by smanek 18y ago

This subject is a serious hobby (approaching business) of mine so I'll comment. Warren Buffet is an investor, namely a value investor. And he does very well with his strategies. But there are other more speculative strategies that work and do provide greater annual returns than his company. The returns for certain strategies, however, diminish when you increase your capital for a certain strategy. There is a difference between what he does and financial speculation. W.B. actively goes out to seek and create value, whereas speculators are scalpers, not actually creating value but by exploiting market inefficiencies. There is also a difference between the value of a company and the supply and demand of the stock of that company. W.B. follows the former with the expectation that the latter will follow (it most often does). His last paragraph is probably the most interesting in this essay. It shows that past returns are certainly not indicative of the future. My guess is that U.S. domestic equities will not have the greatest return as a securities class for a while. See: http://bespokeinvest.typepad.com/bespoke/2008/06/shrinking-usa.html http://bespokeinvest.typepad.com/bespoke/2008/06/shrinking-u...

gscott 18y ago
Reading your comment, it made me think of Yahoo! and the "value" that is in Yahoo! but just isn't seen in it's stock price. Warren Buffet should buy Yahoo! and turn it into the company it should already be but for some reason, isn't.
- steveplace 18y ago
  W.B. refuses to invest in internet companies. He feels that they are overvalued. And there is a difference between stock price and the value of a company. Of course, I also believe that the efficient market hypothesis is bullshit.
  - byrneseyeview 18y ago
    I though the argued that they were hard to understand, not intrinsically worth less than the price at which he could buy them.
kingkongrevenge 18y ago
> W.B. actively goes out to seek and create value I would dispute this. Berkshire Hathaway is essentially an insurance company. Look at revenues. Buffet relies on the peculiar accounting tricks of global insurance and his special relationships in the industry to line up unusual access to ultra-cheap capital at opportune times to seize value opportunities. Buffet is not just another billionaire investor with sharp analysis. He has a bag of special tricks and special relationships. He is just a speculator, not a value creator. The main point I took away is that speculation is a zero sum game, which is practically a truism. Getting returns above the general rate of growth requires outsmarting other investors and pocketing their losses. Total returns are constrained to the general growth rate. You are quite right that many people win at this zero sum game. Buffet seems to endorse the fraudulent popular idea that everyone can fund retirement from the stock market by sharing in the general rate of return. In reality the stock market has historically barely beat inflation and equities investing is really pretty much a straight-up zero sum game.
- steveplace 18y ago
  BRK.A is a conglomeration. Over the past decade they have been in the insurance business (GEICO). But they have also been in other businesses, and I would say that you could consider them like a private equity firm. They would buy companies of good value and build them out. They did it with furniture retail. There is a difference between speculating and investing. Speculating is zero sum and about 80% of the people that trade will lose money. Buffet actually says that diversification is a good idea if you don't know what you're doing. If you can value companies properly then you can have returns greater than the market (beta-weighted). Investing is not zero sum. I'm not going to defend that, it just is. That being said, buy and hold is a dumb idea too. And equities historically beat inflation if you consider dividend payouts.

andrewparker 18y ago

Isn't this the pot calling the kettle black? Warren Buffet manages money on behalf of his investors via his investment vehicle: Berkshire Hathaway. He is a "Helper." Granted, he's a giant leap above the hedge fund world zero-sum game. But, he's still a stock picking "Helper."

nostrademons 18y ago
His incentive structure is different from the mainstream financial industry. Buffett invests his own money and doesn't sell his stock: he started the Buffett Partnership with $100K of his own savings. His gains or losses are proportionally equal to that of his investors. I guess maybe the original limited partners had it different (Buffett probably got a larger share of Berkshire for his $100k than the limited partners got), but I doubt any of them are complaining now. Investing in Berkshire Hathaway is "Heads we both win, tails we both lose. Hope you like betting the same way I do." By contrast, investing in a hedge fund is "Heads I win, tails you lose" and investing in a mutual fund is "Either way I win, tails you lose."
RichardPrice 18y ago
Andrew, I think that's a really good point about the pot calling the kettle black. It’s an assumption in Buffett’s argument that Helpers don’t create value; they just take a portion of the pie. This is a fine assumption to make in an imaginary world, but what it requires is that any opportunities that Helpers invest in, and which go on to create value, would have been spotted by the Gotrocks family. So the Helpers don’t spot any new opportunities; they merely charge for advice on investments that would have been made by the Gotrocks family anyway. How applicable is this assumption to the real world? In the real world, there is no such all-seeing Gotrocks family that spots every new business opportunity that arises, and allocates appropriate capital accordingly. If there had been no venture capitalists (who are one kind of Helper) to invest in Sergey Brin and Larry Page when they were starting Google, say, there is no real world Gotrocks family who would stepped in and invested in them. In the case of Google, the VCs did not just take a portion of the pie that would have been created anyway. The Helpers here are partly responsible for the value that Google created. The actual distinction between a Helper and a non-Helper is not very clear either. If a Helper is an allocator of capital, then all companies are Helpers. VCs allocate capital by buying chunks of companies that, they hope, will create value. Microsoft, say, allocates capital by hiring programmers who, they hope, will create value. Is it possible to draw a distinction between kinds of activities that are value-creating, and kinds that are not? It is hard to see how one could. Perhaps one could try to argue that the activity of buying chunks of companies (as VCs do) is inherently less value-creating than the activity of hiring programmers (as, say, Microsoft does). It doesn’t seem that this argument could work even in principle, as a company that hires programmers, for instance, will frequently pay for them with cash that they have raised from VCs. If the programmers hired by the company create value, the VC is partly responsibility for that. Buffett’s argument is beguilingly simple, and it took me a while to think through what its assumptions are. When you think it through, it really does look like the key assumption is that Helpers don’t create value. And it seems that this assumption could only be true in Buffett’s imagined world if all business opportunities invested in by the Helpers would have been invested in anyway by the Gotrocks. This is the point where Buffett’s model fails to apply to the real world; there is no real world counterpart of the Gotrocks that would find and invest in business opportunities if Helpers did not exist.