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The title is incorrect because Buffett doesn't say playing the market is futile. In fact, he clearly states he believes a few will outperform due to skill (but

The title is incorrect because Buffett doesn't say playing the market is futile. In fact, he clearly states he believes a few will outperform due to skill (but that you can't distinguish which outperformers did so on skill versus luck). What he does say in the quoted part is that a large fund of say 20 billion likely can't outperform due to it's size. That is a big difference from saying that it's futile to play the market (since not everyone is trying to invest 20 billion). It's also similar to what other investors like Peter Lynch believed.. that smaller investors have an advantage over the large funds. This isn't made clear at all in the linked page. As far as I know, Buffett has always felt efficient market theory is wrong and that a few could beat the market on skill. There's also nothing in the linked quote that contradicts this (just the title that suggests it). So the title is clearly deceptive. It suggests that Buffett did not believe in investing skill at a younger age and only changed his stated beliefs after becoming a very successful investor.

gfodor 13y ago
To paraphrase Buffett it's quite nice to have your "opponents" be taught the efficient market hypothesis is a fact, you can't beat the market, etc since its essentially stacking the deck even more in the favor of skilled individual investors.
hsitz 13y ago
I mostly agree. But "playing the market" as its normally understood involves trying to make money on the market within a fairly short time frame, by buying low and selling high. I believe Buffett has many times said that the market is a casino in the short run (playing the market) but becomes an accurate "weighing machine" over the long run (buying and holding for five, ten years or more). E.g., http://www.youtube.com/watch?v=-aYEOsZgRm8 http://www.youtube.com/watch?v=-aYEOsZgRm8 So in that sense Buffett does think "playing the market" is a loser's game (that's played by "speculators", not "investors"), though I don't think that's specifically addressed in the linked letter.
jacques_chester 13y ago
> Buffett has always felt efficient market theory is wrong People often refute the EMH without understand that it is a family of hypotheses, from the Strong to the Weak form, with a great deal of subtlety in their concept and meaning. Buffet's argument in the linked excerpts is actually pretty close to a weak form of the EMH: all participants start with broadly similar information and capabilities, so performance naturally regresses to the mean. Here's my favourite discussion of the EMH: http://skepticlawyer.com.au/2013/05/29/bubble-trouble-all-information-is-not-equal/ http://skepticlawyer.com.au/2013/05/29/bubble-trouble-all-in...
- robotcookies 13y ago
  That's a good point. Many people who don't believe in the strong version do actually fall into the weak form.
  - jacques_chester 13y ago
    I think if people just chill out and accept that the strong form is a model that allows us to sketch out a lower bound of possible outcomes, everyone will be better off. Throwing a model away because it isn't perfect is a case of nirvana fallacy. All models are wrong. We build them because they're mentally tractable. So long as the value of the model exceeds the costs of mismatch, they're a boon.
  - marvin 13y ago
    But there is a very significant difference between the two. The strong form leads you to believe that it is impossible to expect to do better than the average even with a Herculean effort. The weak form allows that it is possible to beat the market, even by a lot, if you have insight or capabilities that most of the market lacks. This leads to wholely different conclusions. In (1), a cheap index fund is the only investment option that isn't equivalent to gambling. This is comforting to believe, because you could feel completely comfortable in not spending any effort on researching your investments. In (2), it is okay to buy a modest position in Google in 2004 because your knowledge of the untapped potential of the Internet hints that Google could be much more important than the (median) skeptic believes. Perhaps most importantly, if you are in camp (2) you will consistently have your investment choices denounced by those in camp (1), which gets very annoying.

gfodor 13y ago

To paraphrase Buffett it's quite nice to have your "opponents" be taught the efficient market hypothesis is a fact, you can't beat the market, etc since its essentially stacking the deck even more in the favor of skilled individual investors.

hsitz 13y ago

I mostly agree. But "playing the market" as its normally understood involves trying to make money on the market within a fairly short time frame, by buying low and selling high. I believe Buffett has many times said that the market is a casino in the short run (playing the market) but becomes an accurate "weighing machine" over the long run (buying and holding for five, ten years or more). E.g., http://www.youtube.com/watch?v=-aYEOsZgRm8 http://www.youtube.com/watch?v=-aYEOsZgRm8 So in that sense Buffett does think "playing the market" is a loser's game (that's played by "speculators", not "investors"), though I don't think that's specifically addressed in the linked letter.

jacques_chester 13y ago

> Buffett has always felt efficient market theory is wrong People often refute the EMH without understand that it is a family of hypotheses, from the Strong to the Weak form, with a great deal of subtlety in their concept and meaning. Buffet's argument in the linked excerpts is actually pretty close to a weak form of the EMH: all participants start with broadly similar information and capabilities, so performance naturally regresses to the mean. Here's my favourite discussion of the EMH: http://skepticlawyer.com.au/2013/05/29/bubble-trouble-all-information-is-not-equal/ http://skepticlawyer.com.au/2013/05/29/bubble-trouble-all-in...

robotcookies 13y ago
That's a good point. Many people who don't believe in the strong version do actually fall into the weak form.
- jacques_chester 13y ago
  I think if people just chill out and accept that the strong form is a model that allows us to sketch out a lower bound of possible outcomes, everyone will be better off. Throwing a model away because it isn't perfect is a case of nirvana fallacy. All models are wrong. We build them because they're mentally tractable. So long as the value of the model exceeds the costs of mismatch, they're a boon.
- marvin 13y ago
  But there is a very significant difference between the two. The strong form leads you to believe that it is impossible to expect to do better than the average even with a Herculean effort. The weak form allows that it is possible to beat the market, even by a lot, if you have insight or capabilities that most of the market lacks. This leads to wholely different conclusions. In (1), a cheap index fund is the only investment option that isn't equivalent to gambling. This is comforting to believe, because you could feel completely comfortable in not spending any effort on researching your investments. In (2), it is okay to buy a modest position in Google in 2004 because your knowledge of the untapped potential of the Internet hints that Google could be much more important than the (median) skeptic believes. Perhaps most importantly, if you are in camp (2) you will consistently have your investment choices denounced by those in camp (1), which gets very annoying.