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A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—

by lutusp 13y ago

A quote from Warren Buffet: "In addition to the ones benefitting from short-term luck, I believe it possible that a few [stock portfolio managers] will succeed—in a modest way—because of skill." Yes, but with an appropriate degree of scientific skepticism, the "skill" assumption could actually be chance. And Occam's razor argues that chance is the more likely cause, not skill. For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). And a few of the managers will do very well indeed, but not because of skill. In fact, one can design a blind computer model that buys and sells stocks randomly, using pseudorandom numbers to make the decisions, and half the accounts will come out ahead of the averages, and a small number will do much better than the averages, just as in real life -- all because of chance. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths

moments 13y ago
Thank you for the interesting link. >statistics tells us that 50 of them will do better than the market averages (and 50 will do worse) This is a common misunderstanding, but actually 50% will do better than the median not the average. Averages can be dominated by extreme events, so more than 50% can do better (or worse) depending on the skew.
- gnaritas 13y ago
  Median is an average, as is mean and mode. Saying median not the average makes no sense. You mean median not the mean. All three are different kinds of averages.
  - moments 13y ago
    I never realized that the median is an average... interesting. So any average can be dominated by extreme events, except the median average. Then we are discussing averages, in general. So, the common misconception would be: -Averages are dominated by the median, and deviation from the mean is symmetric.-
- lutusp 13y ago
  > This is a common misunderstanding, but actually 50% will do better than the median not the average. If the market were skewed to the degree that a symmetrical normal distribution wasn't a realistic model, then (assuming a particular skew) beating the median would be child's play, but it also wouldn't produce returns different than the average portfolio -- that average portfolio that sits at or near the mean, not the median. Another way to say this is that, if a skewed distribution peaked at some mean value M (the value on the curve that has a zero first derivative), and if there was a pathological, nonsymmetrical tail at the right or left that shifted the median value, the majority of portfolios would remain at the mean value in spite of the asymmetry.
mdkess 13y ago
What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and so hockey is just a game of chance. You have to fix your prior. Track performance for some period of time. Then track the winners. This will show whether it's a game of skill or chance.
- dredmorbius 13y ago
  The hockey analog doesn't hold if you can replace any given player with a stochastic robot, which is what stock picker programs (and dart-throwing monkeys) have demonstrated.
- valisystem 13y ago
  You have to adjust your evaluation with the volume. If you're heading for the winning team, then alright, good intelligence on performance will be rewarded. But if you are three investors on the entire competition, it is very likely that skills advantage fades, since all your competitors have strong (if not mandatory) incentive to get top intelligence on the investment. In the end, your performance will be average, and your value earnings volumes will be your share of the entire market value creation for the invested period.
- lutusp 13y ago
  > What is the market? A bunch of fund managers. This is like saying all personal relationships are limited to prostitutes. One can buy stocks directly, or invest in index mutual funds that don't have managers, for the reason that no management is required. > Then track the winners. This will show whether it's a game of skill or chance. But that's been done -- the WSJ Dartboard Contest showed that the experts don't do better than throwing darts at a list of stocks. http://online.wsj.com/article/SB10001424127887324504704578410864000872642.html http://online.wsj.com/article/SB1000142412788732450470457841... My point is that buying and holding an index fund, and relying on long-term market growth instead of phony expertise, is a much better approach to equity investment.
- conanbatt 13y ago
  The market is NOT a bunch of fund managers. Its a representation of the state of assets being debt/credit or company shareholding. The market does not do better because there are fund managers, it does better if the underlying assets increase in value. All the other fluctuations are based on expectancies of those assets and arbitration. It is entirely possible for 100% of fund managers to do below the market average, as fund managers dont own 100% of the market. It is also likely they have a losing bet against a market, as active fund managers employ resources in their operations, by trading and actively managing a portfolio, usually in the form of fees, and potential downsides on extra taxation as well. Tracking "the winners" is the most fallacious and common attempt at gauging how good a fund manager or a stock is doing. Bernie Madoff was one of the winners for decades. Past results give no expectation to the future, which is so misleading given that the most common tool to show the value of a stock is a chart of how it did before, as opposed to how the company is doing (which require reading the statement). I suggest reading "The Intelligent Investor". It is by far the best book on this topic out there , and it has enough layman terms and concepts that are very easy to understand once you expose yourself to them.
haliax 13y ago
> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages.
- rayiner 13y ago
  Fund managers as a whole underperform market indexes.
  - dylangs1030 13y ago
    To expand on this point, Benjamin Graham gives an excellent layman's breakdown of why pursuing an index almost always prevails against trying to "beat the market" in The Intelligent Investor. If you're looking to make money with the market, and you're not looking for a particularly high amount, and time is not an issue, an index fund is the way to go.
- lutusp 13y ago
  > 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages. Oh, the managers will do worse than the market averages, because even if they avoid dumb moves, they will charge you for the privilege of managing your portfolio. My original remark was meant to measure their performance before fees, as the WSJ Dartboard Contest did it (a contest in which the managers weren't able to keep up with market averages). EDIT: for a symmetrical distribution, a distribution for which a classic Gaussian curve is appropriate, the median and the mean are the same.
  - beambot 13y ago
    Indeed, 50 may do worse than the market... but it's not because of a faulty appeal to "statistics." haliax is pointing out that 100 fund managers may not be an unbiased sample. It's perfectly possible to find a biased sample of 100 individuals capable of beating the market (eg. a group of 100 insiders trading illegally). EDIT: The "correct" thing to say is... "Based on evidence, fund managers do not outperform the market. Therefore, in a random sampling of 100 fund managers, we would expect 50 to underperform the market." This assumes (1) there is such evidence (likely?) and (2) that 100 is a sufficiently large sample to overcome the error bounds.
ploomans 13y ago
Warren Buffett once wrote an article about the points you are making: http://www.tilsonfunds.com/superinvestors.pdf http://www.tilsonfunds.com/superinvestors.pdf. Interesting read
- MarkMc 13y ago
  This comment deserves more votes. Buffett's argument in favour of skill is very persuasive, not to mention genuinely funny. Here's an extract: -------------------------------------- I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000. Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping. Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won. By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, "If it can't be done, why are there 215 of us?"
  - lutusp 13y ago
    > Buffet's argument in favour of skill is very persuasive, not to mention genuinely funny. Thanks for posting this -- it's first-rate. The fact that it corresponds exactly to my personal views can't be a factor, of course. :)
tome 13y ago
You can say that about many things. Do Musk and Messi have "skill" or is their success just chance?
- lutusp 13y ago
  For some things, a real scientific experiment isn't possible, because there's isn't enough control. Equities is one of those things. For equities, when you see a performance that beats the market averages, it wise to assume it's because of chance, not genius. Also, there are any number of convincing scams meant to distort one's thinking. My favorite is one I call "Miracle Man", in which a manager mails you six perfectly correct monthly predictions, all in advance of the real market they predict, then asks to take over your portfolio. Hard to believe, but it's a scam, it isn't real: http://arachnoid.com/equities_myths/index.html#Miracle_Man http://arachnoid.com/equities_myths/index.html#Miracle_Man
fleitz 13y ago
The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative. To put it succinctly: On average fund managers reduce ROI. As an alternative measurement, if you take the funds managed by most managers and look at the portfolio 1 year ago the fund would be better off with the previous year's portfolio. (This time mostly because of transaction costs)
- lutusp 13y ago
  > The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative. Yes, a point I make in my article, but didn't make in my post. Fund managers are very difficult to justify.
deleted 13y ago
[deleted]
wheaties 13y ago
There are managers who excel at investing money and unlocking value. Just because most managers in assets and investment vehicles afforded by those whose worth is not of a sufficient level does not mean they do not exist. People who can, do. They happen to charge 2 and 20 for the privilege of working your money.
- lutusp 13y ago
  > There are managers who excel at investing money and unlocking value. From a scientific standpoint, that is false. You need to realize that it's not possible to show (prove, demonstrate) that such stories arise from anything but chance. A certain number of people are going to do very well because of chance, and some of those people are going to try to pose as experts. But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it, then that "system" would become the norm -- the market average performance. And if there really was a way to beat the market averages, if it was possible to make a huge sum of money systematically without risk or uncertainty, using a scheme other than chance, businesspeople (who are not fools) would refuse to raise capital using equities. If you think hard enough, you will realize why there cannot be a deterministic, legal system to beat the market. There's always insider trading, but that's illegal for a reason. > Just because most managers in assets and investment vehicles afforded by those whose worth is not of a sufficient level does not mean they do not exist. They do not exist. I just proved it. If you didn't understand the above proof, read it again.
  - im3w1l 13y ago
    >But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it. Not if it's costly. By that I mean what if there is a market oracle that can pick tomorrows winners, but you have to pay X dollars to pull the crank and get the info. In that case, it could be possible to "beat the market" in the sense that your stocks overperform, but you do not actually beat the market if you factor in the cost of the oracle. Real world example: http://www.cnbc.com/id/100809395 http://www.cnbc.com/id/100809395 >A closely watched consumer confidence number that routinely moves markets upon release is accessed by an elite group of traders, for a fee, a full two seconds before its official release, according to a document obtained by CNBC. Another situation would be that you could overperform the market if you hired thousands of employees that analysed the markets, but not so much that you could pay their wages and still win. It could also be the case that some people have a comparative advantage. Maybe they have certain skills that enable them to win were other people cannot.
klodolph 13y ago
> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). If you're going to simplify things, take out the numbers because the numbers are wrong. For example, let's suppose that there are six companies you can invest in, and six managers who each invest in one company. One company grows 600%, and the other five declare bankruptcy. Average growth is 16%, but only 1 in 6 managers beat the average. The other thing that's wrong is that you use the term "statistics" where you mean "probability theory". Probability theory describes how many managers you'd expect to beat the average. Statistics describes how you'd test this.
- lutusp 13y ago
  > If you're going to simplify things, take out the numbers because the numbers are wrong. The numbers are exactly right. The problem lies with your example in which businesses either grow without bound or go bankrupt. In the real world, and typically, half of investors do better, and half do worse, than the market average. > The other thing that's wrong is that you use the term "statistics" where you mean "probability theory". Since one forms the foundation of the other, that's a distinction without a difference, especially when conversing with people who think there are secrets of the winners. The ideas are very simple, and specifying which aspect of statistics gives the most detail is hardly worth specifying. http://en.wikipedia.org/wiki/Probability_theory http://en.wikipedia.org/wiki/Probability_theory Quote: "As a mathematical foundation for statistics, probability theory is essential to many human activities that involve quantitative analysis of large sets of data."
  - jholman 13y ago
    You're mistaken on both counts, even though your top-level point is essentially correct. On the first count, you're mistaken because there's no reason to assume that the distribution is symmetric. This doesn't damage your point, but as klodoph says, your actual example numbers are not necessarily representative. You'll note that this minor mistake in your comment has attracted a legion of minor corrections, all of them correct, all of them missing (or at least ignoring) your most-important point. On the second count, that's like saying that math is the foundation of computing, and so the two are indistinguishable. klodolph is correct that the two are different, and it doesn't affect your point at all, so you should acknowledge the minor correction and stick to the relevant point. More generally, did you notice that your top-level comment was basically saying "Warren Buffet is wrong about this aspect of investing"? You could be right, but it's not likely. I believe the reason for this mistake is that you may have have misread this sample of Buffet's thinking (and your overall claims as I understand them may actually agree with and Buffet as I understand him). (In my humble understanding) Buffet claims that there may or may not exist investors who have superior (or inferior) skill, but that in MOST cases the results are due to luck, and "skilled" investors are mostly indistinguishable from lucky investors. Although I have not seen you agree or disagree with this claim, I note that all of your arguments are consistent with this. Your arguments revolve around being unable to determine which are which, after the fact; so do Buffet's! I further note that it seems ludicrous to claim that there do not exist anti-skilled investors, and thus all other investors will be more skilled than the mean skill level, and that this probably won't matter, because luck will drown it all out. My overall points here are: * I agree with your high-level claims (as I understand them) about money-managers * I believe Warren Buffet, in this letter to Katherine Graham, agrees with your high-level claims * nearly every commenter in these threads agrees with your high-level claims * the comment by wheaties is a counter-example * some of the minor details of your points are technically wrong or confusing, in ways that invite nit-picking, but do not impact your actual argument On the other hand, starting on page 15 (of 19), Buffet suggests (and advocates) an alternative (his #5) that is NOT fully respectful of the efficient market hypothesis. So your position is not Buffet's entire position (though I see from your Equities Myths page that you have noticed this, and you suggest that perhaps Buffet is nothing except lucky).
jrs235 13y ago
No. For 100 stock fund managers buying and selling stocks, statistics tell us that 50 of them will do better than the average of them (than the lower 50). To assume half will do better than the market is a failure of logic, assuming non stock fund managers are allowed to buy and sell too. Please qualify and clarify what you actually mean.

by lutusp 13y ago

moments 13y ago

Thank you for the interesting link. >statistics tells us that 50 of them will do better than the market averages (and 50 will do worse) This is a common misunderstanding, but actually 50% will do better than the median not the average. Averages can be dominated by extreme events, so more than 50% can do better (or worse) depending on the skew.

gnaritas 13y ago
Median is an average, as is mean and mode. Saying median not the average makes no sense. You mean median not the mean. All three are different kinds of averages.
- moments 13y ago
  I never realized that the median is an average... interesting. So any average can be dominated by extreme events, except the median average. Then we are discussing averages, in general. So, the common misconception would be: -Averages are dominated by the median, and deviation from the mean is symmetric.-
lutusp 13y ago
> This is a common misunderstanding, but actually 50% will do better than the median not the average. If the market were skewed to the degree that a symmetrical normal distribution wasn't a realistic model, then (assuming a particular skew) beating the median would be child's play, but it also wouldn't produce returns different than the average portfolio -- that average portfolio that sits at or near the mean, not the median. Another way to say this is that, if a skewed distribution peaked at some mean value M (the value on the curve that has a zero first derivative), and if there was a pathological, nonsymmetrical tail at the right or left that shifted the median value, the majority of portfolios would remain at the mean value in spite of the asymmetry.

mdkess 13y ago

What is the market? A bunch of fund managers. So your critique about not beating the median like saying half of all hockey players are worse than the median and so hockey is just a game of chance. You have to fix your prior. Track performance for some period of time. Then track the winners. This will show whether it's a game of skill or chance.

dredmorbius 13y ago
The hockey analog doesn't hold if you can replace any given player with a stochastic robot, which is what stock picker programs (and dart-throwing monkeys) have demonstrated.
valisystem 13y ago
You have to adjust your evaluation with the volume. If you're heading for the winning team, then alright, good intelligence on performance will be rewarded. But if you are three investors on the entire competition, it is very likely that skills advantage fades, since all your competitors have strong (if not mandatory) incentive to get top intelligence on the investment. In the end, your performance will be average, and your value earnings volumes will be your share of the entire market value creation for the invested period.
lutusp 13y ago
> What is the market? A bunch of fund managers. This is like saying all personal relationships are limited to prostitutes. One can buy stocks directly, or invest in index mutual funds that don't have managers, for the reason that no management is required. > Then track the winners. This will show whether it's a game of skill or chance. But that's been done -- the WSJ Dartboard Contest showed that the experts don't do better than throwing darts at a list of stocks. http://online.wsj.com/article/SB10001424127887324504704578410864000872642.html http://online.wsj.com/article/SB1000142412788732450470457841... My point is that buying and holding an index fund, and relying on long-term market growth instead of phony expertise, is a much better approach to equity investment.
conanbatt 13y ago
The market is NOT a bunch of fund managers. Its a representation of the state of assets being debt/credit or company shareholding. The market does not do better because there are fund managers, it does better if the underlying assets increase in value. All the other fluctuations are based on expectancies of those assets and arbitration. It is entirely possible for 100% of fund managers to do below the market average, as fund managers dont own 100% of the market. It is also likely they have a losing bet against a market, as active fund managers employ resources in their operations, by trading and actively managing a portfolio, usually in the form of fees, and potential downsides on extra taxation as well. Tracking "the winners" is the most fallacious and common attempt at gauging how good a fund manager or a stock is doing. Bernie Madoff was one of the winners for decades. Past results give no expectation to the future, which is so misleading given that the most common tool to show the value of a stock is a chart of how it did before, as opposed to how the company is doing (which require reading the statement). I suggest reading "The Intelligent Investor". It is by far the best book on this topic out there , and it has enough layman terms and concepts that are very easy to understand once you expose yourself to them.

haliax 13y ago

> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages.

rayiner 13y ago
Fund managers as a whole underperform market indexes.
- dylangs1030 13y ago
  To expand on this point, Benjamin Graham gives an excellent layman's breakdown of why pursuing an index almost always prevails against trying to "beat the market" in The Intelligent Investor. If you're looking to make money with the market, and you're not looking for a particularly high amount, and time is not an issue, an index fund is the way to go.
lutusp 13y ago
> 50 will do better/worse than the MEDIAN of that GROUP OF 100 fund managers, not the market averages. Oh, the managers will do worse than the market averages, because even if they avoid dumb moves, they will charge you for the privilege of managing your portfolio. My original remark was meant to measure their performance before fees, as the WSJ Dartboard Contest did it (a contest in which the managers weren't able to keep up with market averages). EDIT: for a symmetrical distribution, a distribution for which a classic Gaussian curve is appropriate, the median and the mean are the same.
- beambot 13y ago
  Indeed, 50 may do worse than the market... but it's not because of a faulty appeal to "statistics." haliax is pointing out that 100 fund managers may not be an unbiased sample. It's perfectly possible to find a biased sample of 100 individuals capable of beating the market (eg. a group of 100 insiders trading illegally). EDIT: The "correct" thing to say is... "Based on evidence, fund managers do not outperform the market. Therefore, in a random sampling of 100 fund managers, we would expect 50 to underperform the market." This assumes (1) there is such evidence (likely?) and (2) that 100 is a sufficiently large sample to overcome the error bounds.

ploomans 13y ago

Warren Buffett once wrote an article about the points you are making: http://www.tilsonfunds.com/superinvestors.pdf http://www.tilsonfunds.com/superinvestors.pdf. Interesting read

MarkMc 13y ago
This comment deserves more votes. Buffett's argument in favour of skill is very persuasive, not to mention genuinely funny. Here's an extract: -------------------------------------- I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000. Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping. Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won. By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, "If it can't be done, why are there 215 of us?"
- lutusp 13y ago
  > Buffet's argument in favour of skill is very persuasive, not to mention genuinely funny. Thanks for posting this -- it's first-rate. The fact that it corresponds exactly to my personal views can't be a factor, of course. :)

tome 13y ago

You can say that about many things. Do Musk and Messi have "skill" or is their success just chance?

lutusp 13y ago
For some things, a real scientific experiment isn't possible, because there's isn't enough control. Equities is one of those things. For equities, when you see a performance that beats the market averages, it wise to assume it's because of chance, not genius. Also, there are any number of convincing scams meant to distort one's thinking. My favorite is one I call "Miracle Man", in which a manager mails you six perfectly correct monthly predictions, all in advance of the real market they predict, then asks to take over your portfolio. Hard to believe, but it's a scam, it isn't real: http://arachnoid.com/equities_myths/index.html#Miracle_Man http://arachnoid.com/equities_myths/index.html#Miracle_Man

fleitz 13y ago

The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative. To put it succinctly: On average fund managers reduce ROI. As an alternative measurement, if you take the funds managed by most managers and look at the portfolio 1 year ago the fund would be better off with the previous year's portfolio. (This time mostly because of transaction costs)

lutusp 13y ago
> The problem is fundamentally that fund managers consume a large portion of the returns, after you factor the cost of the fund manager the result is negative. Yes, a point I make in my article, but didn't make in my post. Fund managers are very difficult to justify.

deleted 13y ago

[deleted]

wheaties 13y ago

There are managers who excel at investing money and unlocking value. Just because most managers in assets and investment vehicles afforded by those whose worth is not of a sufficient level does not mean they do not exist. People who can, do. They happen to charge 2 and 20 for the privilege of working your money.

lutusp 13y ago
> There are managers who excel at investing money and unlocking value. From a scientific standpoint, that is false. You need to realize that it's not possible to show (prove, demonstrate) that such stories arise from anything but chance. A certain number of people are going to do very well because of chance, and some of those people are going to try to pose as experts. But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it, then that "system" would become the norm -- the market average performance. And if there really was a way to beat the market averages, if it was possible to make a huge sum of money systematically without risk or uncertainty, using a scheme other than chance, businesspeople (who are not fools) would refuse to raise capital using equities. If you think hard enough, you will realize why there cannot be a deterministic, legal system to beat the market. There's always insider trading, but that's illegal for a reason. > Just because most managers in assets and investment vehicles afforded by those whose worth is not of a sufficient level does not mean they do not exist. They do not exist. I just proved it. If you didn't understand the above proof, read it again.
- im3w1l 13y ago
  >But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it. Not if it's costly. By that I mean what if there is a market oracle that can pick tomorrows winners, but you have to pay X dollars to pull the crank and get the info. In that case, it could be possible to "beat the market" in the sense that your stocks overperform, but you do not actually beat the market if you factor in the cost of the oracle. Real world example: http://www.cnbc.com/id/100809395 http://www.cnbc.com/id/100809395 >A closely watched consumer confidence number that routinely moves markets upon release is accessed by an elite group of traders, for a fee, a full two seconds before its official release, according to a document obtained by CNBC. Another situation would be that you could overperform the market if you hired thousands of employees that analysed the markets, but not so much that you could pay their wages and still win. It could also be the case that some people have a comparative advantage. Maybe they have certain skills that enable them to win were other people cannot.

klodolph 13y ago

> For 100 stock fund managers buying and selling stocks, statistics tells us that 50 of them will do better than the market averages (and 50 will do worse). If you're going to simplify things, take out the numbers because the numbers are wrong. For example, let's suppose that there are six companies you can invest in, and six managers who each invest in one company. One company grows 600%, and the other five declare bankruptcy. Average growth is 16%, but only 1 in 6 managers beat the average. The other thing that's wrong is that you use the term "statistics" where you mean "probability theory". Probability theory describes how many managers you'd expect to beat the average. Statistics describes how you'd test this.

lutusp 13y ago
> If you're going to simplify things, take out the numbers because the numbers are wrong. The numbers are exactly right. The problem lies with your example in which businesses either grow without bound or go bankrupt. In the real world, and typically, half of investors do better, and half do worse, than the market average. > The other thing that's wrong is that you use the term "statistics" where you mean "probability theory". Since one forms the foundation of the other, that's a distinction without a difference, especially when conversing with people who think there are secrets of the winners. The ideas are very simple, and specifying which aspect of statistics gives the most detail is hardly worth specifying. http://en.wikipedia.org/wiki/Probability_theory http://en.wikipedia.org/wiki/Probability_theory Quote: "As a mathematical foundation for statistics, probability theory is essential to many human activities that involve quantitative analysis of large sets of data."
- jholman 13y ago
  You're mistaken on both counts, even though your top-level point is essentially correct. On the first count, you're mistaken because there's no reason to assume that the distribution is symmetric. This doesn't damage your point, but as klodoph says, your actual example numbers are not necessarily representative. You'll note that this minor mistake in your comment has attracted a legion of minor corrections, all of them correct, all of them missing (or at least ignoring) your most-important point. On the second count, that's like saying that math is the foundation of computing, and so the two are indistinguishable. klodolph is correct that the two are different, and it doesn't affect your point at all, so you should acknowledge the minor correction and stick to the relevant point. More generally, did you notice that your top-level comment was basically saying "Warren Buffet is wrong about this aspect of investing"? You could be right, but it's not likely. I believe the reason for this mistake is that you may have have misread this sample of Buffet's thinking (and your overall claims as I understand them may actually agree with and Buffet as I understand him). (In my humble understanding) Buffet claims that there may or may not exist investors who have superior (or inferior) skill, but that in MOST cases the results are due to luck, and "skilled" investors are mostly indistinguishable from lucky investors. Although I have not seen you agree or disagree with this claim, I note that all of your arguments are consistent with this. Your arguments revolve around being unable to determine which are which, after the fact; so do Buffet's! I further note that it seems ludicrous to claim that there do not exist anti-skilled investors, and thus all other investors will be more skilled than the mean skill level, and that this probably won't matter, because luck will drown it all out. My overall points here are: * I agree with your high-level claims (as I understand them) about money-managers * I believe Warren Buffet, in this letter to Katherine Graham, agrees with your high-level claims * nearly every commenter in these threads agrees with your high-level claims * the comment by wheaties is a counter-example * some of the minor details of your points are technically wrong or confusing, in ways that invite nit-picking, but do not impact your actual argument On the other hand, starting on page 15 (of 19), Buffet suggests (and advocates) an alternative (his #5) that is NOT fully respectful of the efficient market hypothesis. So your position is not Buffet's entire position (though I see from your Equities Myths page that you have noticed this, and you suggest that perhaps Buffet is nothing except lucky).

jrs235 13y ago

No. For 100 stock fund managers buying and selling stocks, statistics tell us that 50 of them will do better than the average of them (than the lower 50). To assume half will do better than the market is a failure of logic, assuming non stock fund managers are allowed to buy and sell too. Please qualify and clarify what you actually mean.