Hacker News Reader

Comment by svantana | Hacker News Reader

Wow, that's an average 26% per year increase (for the non-inflation-adjusted data) over a 70 year timespan. That's definitely not a random walk down wall street [1]. For reference, Dow Jones seems to have about 7% per year for the same time period.

[1] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

View on HN

"We find that [Buffett's] alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management."

http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...

It can be easy with hindsight to say oh you should have just done Betting-Against-Beta and Quality-Minus-Junk. It doesn't mean those strategies are going to win over the next decades.

Oh so all you've gotta do is pick cheap, safe, quality stocks.

Got it.

Low beta just means low historic correlation with market returns. It can be computed mechanically with no subjective judgement needed

https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model

If you had invested in low beta stocks, leveraged at the same level as Buffett you would not have performed much worse.

Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI and I've been pondering this efficiency hypothesis.

Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision.

What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea).

I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.

It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)?

1. http://blogmaverick.com/2013/01/10/the-stock-market-2/

He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.

Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run.

I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right.

That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.

> or those successful investors are just the lucky ones

Buffett directly answers this question

http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....

I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".

He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!

The market is irrational but it can stay irrational longer than you can stay solvent.

If UPRO (s&p 500 leveraged 3x) had existed since the early 50s, it would've averaged about 20%-25% gains per year up until now. Warren Buffett also used leverage to invest.

Also note his net worth increased even during recession times ,of which there were twelve during his lifetime so far, except for the 1974-1975 recession.

Well, how many trades did he do? Is that number high enough to statistically determine if he is really more skilled than the average investor?

Actually, if I remember right, he said he bought ONLY when stock was under priced as per his analysis. A few big transactions a year vs. "trader" type frequent transactions.

Even running a statistical test won't cut it. How could a statistical test account for the fact that an internet celebrity trader might be less likely to discuss his losing trades?

Reply on news.ycombinator.com