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Sounds like a good time to pull out A Random Walk Down Wall Street again, for the uninitiated: http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338

Sounds like a good time to pull out A Random Walk Down Wall Street again, for the uninitiated: http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338 http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/039333... I wonder how well tulip bulbs are doing these days.

cremnob 13y ago
The investing success of value investors of all kind would not be possible if the premise of his book, the efficient-market hypothesis, was correct. Warren Buffett's track record is a repudiation of it.
- czr80 13y ago
  I don't think the (strong) version of the efficient-market hypothesis is defensible but Warren Buffet's track record is not proof that it is wrong - in a random market, given a large number of investors, some will do well purely by chance.
  - aprescott 13y ago
    Not necessarily refuting what you're saying, but here's an interesting take on "purely by chance" from Buffett, by analogy of coin flipping and getting a run of heads: http://www.tilsonfunds.com/superinvestors.html http://www.tilsonfunds.com/superinvestors.html
    - czr80 13y ago
      That's a great article, thanks. I actually had the coin example in mind when I wrote the comment, but was too busy to write out the full argument!
- btilly 13y ago
  Not necessarily. Warren Buffett's track record is helped by two major factors. The first is that, being Warren Buffett, he gets opportunities that regular investors don't. For instance look at the 2008 sweetheart deal he got on Goldman Sachs. Any smart investor would have leaped at it, but the value to them of saying, "Warren Buffett believes in us" was why he was offered the deal instead of someone else. The second is that Warren Buffett is a big fan of buying and holding companies. Which leaves him in charge. By all accounts from the CEOs who continue to work for him, he is a phenomenal manager. Therefore the fact of his investing creates long-term improved returns. When you move away from Warren Buffett, who else has been able to demonstrate long-term returns above what mere chance says is likely for someone to achieve by luck? In one study that I saw, there was only one other, Peter Lynch. The odds that someone anywhere in the mutual fund industry would match him by chance were under 5%. So there you have evidence that it is possible to beat the market for the right person. But what advice does Peter Lynch himself give investors these days? If you want to invest in the stock market, buy and hold an indexed mutual fund! Nobody seriously believes that the efficient market hypothesis is literally true. However your odds of being able to identify and exploit such inefficiencies in the broader market are sufficiently low that you are best off acting as if it is.
  - cremnob 13y ago
    There are many investors who have outperformed over long periods of time, they just aren't household names (Seth Klarman is one). What you ascribe to Buffett's success only came late in his career, those opportunities weren't possible when he was running a hedge fund and the early days of Berkshire.
    - btilly 13y ago
      Early in Buffett's career he had the advantage of believing in value investing before that idea was widely accepted in the broader market. It is easier to make a profit in an inefficient market than an efficient one. The inefficiencies that he was exploiting are generally harder to find these days. But today he has other ways to make money. This is not to say that he is not an extraordinary investor - he is. However he's benefited from many advantages beyond just raw investment talent. And as a practical matter, any investor who thinks that they can easily replicate his success is likely to fail.
  - clarky07 13y ago
    Anyone ascribing to efficient market hypothesis doesn't watch the market very much. Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis. Regarding Buffett, he doesn't take over everything. He buys and sells a lot of stock where he doesn't take control, and he does very well doing that as well. Also, he's being doing it for a long long time. This isn't simply flipping 20 heads in a row when you've been doing it for 60+ years
    - btilly 13y ago
      Anyone ascribing to efficient market hypothesis doesn't watch the market very much. Considering that the efficient market hypothesis came out of academics studying the market, and has been tested in many ways, your hypothesis is somewhat suspect. Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis. It appears that you do not actually understand the hypothesis that you reject out of hand. The hypothesis is not that the market knows the true value of the company, it does not. It is that the best available information on what the price of the company should be is already integrated into the current company price. As information shifts just slightly about likely long-term prospects, the best estimate of its price can move a lot. This is not news. Nor is the fact that unavailable future information will change the price. Nor is volatility. Now if you disbelieve the efficient market hypothesis, then fine. However any inefficiency that you discover, once it becomes known, will naturally stop working. I've seen this happen with several that I knew about. Over time the efficient market hypothesis tends to work better and better.

cremnob 13y ago

The investing success of value investors of all kind would not be possible if the premise of his book, the efficient-market hypothesis, was correct. Warren Buffett's track record is a repudiation of it.

czr80 13y ago
I don't think the (strong) version of the efficient-market hypothesis is defensible but Warren Buffet's track record is not proof that it is wrong - in a random market, given a large number of investors, some will do well purely by chance.
- aprescott 13y ago
  Not necessarily refuting what you're saying, but here's an interesting take on "purely by chance" from Buffett, by analogy of coin flipping and getting a run of heads: http://www.tilsonfunds.com/superinvestors.html http://www.tilsonfunds.com/superinvestors.html
  - czr80 13y ago
    That's a great article, thanks. I actually had the coin example in mind when I wrote the comment, but was too busy to write out the full argument!
btilly 13y ago
Not necessarily. Warren Buffett's track record is helped by two major factors. The first is that, being Warren Buffett, he gets opportunities that regular investors don't. For instance look at the 2008 sweetheart deal he got on Goldman Sachs. Any smart investor would have leaped at it, but the value to them of saying, "Warren Buffett believes in us" was why he was offered the deal instead of someone else. The second is that Warren Buffett is a big fan of buying and holding companies. Which leaves him in charge. By all accounts from the CEOs who continue to work for him, he is a phenomenal manager. Therefore the fact of his investing creates long-term improved returns. When you move away from Warren Buffett, who else has been able to demonstrate long-term returns above what mere chance says is likely for someone to achieve by luck? In one study that I saw, there was only one other, Peter Lynch. The odds that someone anywhere in the mutual fund industry would match him by chance were under 5%. So there you have evidence that it is possible to beat the market for the right person. But what advice does Peter Lynch himself give investors these days? If you want to invest in the stock market, buy and hold an indexed mutual fund! Nobody seriously believes that the efficient market hypothesis is literally true. However your odds of being able to identify and exploit such inefficiencies in the broader market are sufficiently low that you are best off acting as if it is.
- cremnob 13y ago
  There are many investors who have outperformed over long periods of time, they just aren't household names (Seth Klarman is one). What you ascribe to Buffett's success only came late in his career, those opportunities weren't possible when he was running a hedge fund and the early days of Berkshire.
  - btilly 13y ago
    Early in Buffett's career he had the advantage of believing in value investing before that idea was widely accepted in the broader market. It is easier to make a profit in an inefficient market than an efficient one. The inefficiencies that he was exploiting are generally harder to find these days. But today he has other ways to make money. This is not to say that he is not an extraordinary investor - he is. However he's benefited from many advantages beyond just raw investment talent. And as a practical matter, any investor who thinks that they can easily replicate his success is likely to fail.
- clarky07 13y ago
  Anyone ascribing to efficient market hypothesis doesn't watch the market very much. Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis. Regarding Buffett, he doesn't take over everything. He buys and sells a lot of stock where he doesn't take control, and he does very well doing that as well. Also, he's being doing it for a long long time. This isn't simply flipping 20 heads in a row when you've been doing it for 60+ years
  - btilly 13y ago
    Anyone ascribing to efficient market hypothesis doesn't watch the market very much. Considering that the efficient market hypothesis came out of academics studying the market, and has been tested in many ways, your hypothesis is somewhat suspect. Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis. It appears that you do not actually understand the hypothesis that you reject out of hand. The hypothesis is not that the market knows the true value of the company, it does not. It is that the best available information on what the price of the company should be is already integrated into the current company price. As information shifts just slightly about likely long-term prospects, the best estimate of its price can move a lot. This is not news. Nor is the fact that unavailable future information will change the price. Nor is volatility. Now if you disbelieve the efficient market hypothesis, then fine. However any inefficiency that you discover, once it becomes known, will naturally stop working. I've seen this happen with several that I knew about. Over time the efficient market hypothesis tends to work better and better.