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> That's not a particularly interesting question (and it's not an improbable unbroken streak of 39 years, but a mixture of successes and failures, much more lik

> That's not a particularly interesting question (and it's not an improbable unbroken streak of 39 years, but a mixture of successes and failures, much more likely to result from chance). Why is any particular permutation of 39 wins and 8 losses more improbable than another? That's like saying HHHTT is more likely than HTHTH. > The herd can be relied on to make Buffett's choices after he has established his position, which means he's positioned to benefit from the public's responses to his choices. But now you're playing it both ways. Are markets efficient or not? Can't every rational investor realize the herd will do this and just ape Buffett? I may have misunderstood, but your thesis seems to be that markets are efficient, and no strategy can consistently beat the market over time. My thesis is that we have an existence proof that isn't the case.

lutusp 13y ago
>> That's not a particularly interesting question (and it's not an improbable unbroken streak of 39 years, but a mixture of successes and failures, much more likely to result from chance). > Why is any particular permutation of 39 wins and 8 losses more improbable than another? That's like saying HHHTT is more likely than HTHTH. Again, that is not what I said. Are you trying to misinterpret, or is this all inadvertent? Had I anticipated your effort to misinterpret, I would have said that a random sequence of 39 heads is less probable than three sequences of 13 heads, each separated by some other unidentified, random sequences or, as I put it originally, "a mixture of successes and failures". >> The herd can be relied on to make Buffett's choices after he has established his position, which means he's positioned to benefit from the public's responses to his choices. > But now you're playing it both ways. Nonsense. I'm explaining how any outcome can be attributed to chance, not that they are explained by chance. > Are markets efficient or not? That's not even a topic, and if it were, it wouldn't be a binary choice. > I may have misunderstood, You thoroughly misunderstood, no ambiguity. And no offense meant. > ... but your thesis seems to be that markets are efficient, and no strategy can consistently beat the market over time. No to the first (no one knows) but absolutely yes to the second -- no strategy can consistently beat the market over time. Isn't that obvious? Any strategy that consistently beat the market, and that could be expressed as a deterministic algorithm, and that was something other than a transient effect of no real value, could be used to drain the market of its capital in a matter of months -- and therefore it would be. The market would collapse and businesses would refuse to trust equities. My point? If there really was such a strategy, it would demolish the market, meaning there would be no remaining market to beat consistently. The golden goose would lie dead. Just think a bit more deeply.
- throwawaymsft 13y ago
  I appreciate the discussion, let me clarify. > a random sequence of 39 heads is less probable than three sequences of 13 heads, each separated by some other unidentified, random sequences Investors are not going for streaks. They are going for overall return. A better way to put it: what are the chances that over a 48-year timeframe, a random strategy will return ~20% annualized return compared to the market's ~10%? Ignore an arbitrary year limitation (why not measure monthly or daily return?). What is the chance a random strategy would outperform so long? Or, a better question: what is a chance that a random strategy will be the best-performing investment over a 30-year period (1926-2011), and the subject of academic studies: http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20... Buffett is an existence proof that investment is skill, not chance. He created the 9th most valuable company in the world. You can believe that was entirely due to chance if you wish. (On beating the market consistently: you don't have to crush the market to extract value. Certain strategies only work for certain amounts of capital. You can be an Apex predator and not drive the entire ecosystem into extinction.)
  - lutusp 13y ago
    > A better way to put it: what are the chances that over a 48-year timeframe, a random strategy will return ~20% annualized return compared to the market's ~10%? Easily answered. Let's say that a 10% return is the mean return, and one standard deviation is 5% -- just an example, and these numbers aren't real (although they could be established by asking everyone what their returns are). So a return of 20% or better represents two standard deviations above the norm, or 2.2% of the investing population (this is a one-tailed distribution). How many investors will achieve that result in a large population? 2.2%. In a pool of a million investors, that's 22,000 people. > Buffett is an existence proof that investment is skill, not chance. With all respect, it's more accurate to say that your view of probability is an existence proof that many people don't understand statistics. Let me ask you -- do you understand how science works? Scientists don't say what you just said, ever. They say that the probability that this outcome resulted from chance is p ("p-value"), referring to the probability that the result arose because of chance. (My 2.2% probability above is a p-value.) When the LHC scientists announced that they believed they might have detected the Higgs boson, did they say that their measurement constituted an "existence proof" that the Higgs was real? No, because they were scientists addressing educated people, they expressed their result in terms of a p-value -- p was the probability that their result came about because of chance, not the hypothesized particle. A chance result isn't the last possibility that a scientist considers, it's the first. And no one who has been educated claims that a result that might have arisen by chance constitutes an "existence proof".

lutusp 13y ago

>> That's not a particularly interesting question (and it's not an improbable unbroken streak of 39 years, but a mixture of successes and failures, much more likely to result from chance). > Why is any particular permutation of 39 wins and 8 losses more improbable than another? That's like saying HHHTT is more likely than HTHTH. Again, that is not what I said. Are you trying to misinterpret, or is this all inadvertent? Had I anticipated your effort to misinterpret, I would have said that a random sequence of 39 heads is less probable than three sequences of 13 heads, each separated by some other unidentified, random sequences or, as I put it originally, "a mixture of successes and failures". >> The herd can be relied on to make Buffett's choices after he has established his position, which means he's positioned to benefit from the public's responses to his choices. > But now you're playing it both ways. Nonsense. I'm explaining how any outcome can be attributed to chance, not that they are explained by chance. > Are markets efficient or not? That's not even a topic, and if it were, it wouldn't be a binary choice. > I may have misunderstood, You thoroughly misunderstood, no ambiguity. And no offense meant. > ... but your thesis seems to be that markets are efficient, and no strategy can consistently beat the market over time. No to the first (no one knows) but absolutely yes to the second -- no strategy can consistently beat the market over time. Isn't that obvious? Any strategy that consistently beat the market, and that could be expressed as a deterministic algorithm, and that was something other than a transient effect of no real value, could be used to drain the market of its capital in a matter of months -- and therefore it would be. The market would collapse and businesses would refuse to trust equities. My point? If there really was such a strategy, it would demolish the market, meaning there would be no remaining market to beat consistently. The golden goose would lie dead. Just think a bit more deeply.

throwawaymsft 13y ago
I appreciate the discussion, let me clarify. > a random sequence of 39 heads is less probable than three sequences of 13 heads, each separated by some other unidentified, random sequences Investors are not going for streaks. They are going for overall return. A better way to put it: what are the chances that over a 48-year timeframe, a random strategy will return ~20% annualized return compared to the market's ~10%? Ignore an arbitrary year limitation (why not measure monthly or daily return?). What is the chance a random strategy would outperform so long? Or, a better question: what is a chance that a random strategy will be the best-performing investment over a 30-year period (1926-2011), and the subject of academic studies: http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20... Buffett is an existence proof that investment is skill, not chance. He created the 9th most valuable company in the world. You can believe that was entirely due to chance if you wish. (On beating the market consistently: you don't have to crush the market to extract value. Certain strategies only work for certain amounts of capital. You can be an Apex predator and not drive the entire ecosystem into extinction.)
- lutusp 13y ago
  > A better way to put it: what are the chances that over a 48-year timeframe, a random strategy will return ~20% annualized return compared to the market's ~10%? Easily answered. Let's say that a 10% return is the mean return, and one standard deviation is 5% -- just an example, and these numbers aren't real (although they could be established by asking everyone what their returns are). So a return of 20% or better represents two standard deviations above the norm, or 2.2% of the investing population (this is a one-tailed distribution). How many investors will achieve that result in a large population? 2.2%. In a pool of a million investors, that's 22,000 people. > Buffett is an existence proof that investment is skill, not chance. With all respect, it's more accurate to say that your view of probability is an existence proof that many people don't understand statistics. Let me ask you -- do you understand how science works? Scientists don't say what you just said, ever. They say that the probability that this outcome resulted from chance is p ("p-value"), referring to the probability that the result arose because of chance. (My 2.2% probability above is a p-value.) When the LHC scientists announced that they believed they might have detected the Higgs boson, did they say that their measurement constituted an "existence proof" that the Higgs was real? No, because they were scientists addressing educated people, they expressed their result in terms of a p-value -- p was the probability that their result came about because of chance, not the hypothesized particle. A chance result isn't the last possibility that a scientist considers, it's the first. And no one who has been educated claims that a result that might have arisen by chance constitutes an "existence proof".