Hacker News Reader

Comment by iambateman | Hacker News Reader

Buffet’s approach to life is interesting for the same reason an Olympic gymnast is interesting. He has specialized to an extreme and is taking advantage of the rewards of that specialization and natural talent in a unique way.

It’s easy for me to feel shame that I don’t read 8 hours per day, as Warren and Charlie do. Buffett is a phenomenal investor but by all accounts, rather odd. He eats like crap, doesn’t exercise, had a profoundly weird relationship with his wife, and seems addicted to his work at the expense of everything else.

My point is this: his practice of reading income statements and business reports 8 hours per day for 60 years doesn’t make him the kind of person I wish to emulate.

Don’t get me wrong, I respect his levelheadedness toward money, lack of polish wrt PR, and generous philanthropic efforts. There’s a lot of good. But it’s easy to idolize the guy.

View on HN

Controversial take: Buffett is actually not a great investor in the way people think. Via the float in his insurance companies, he receives a 0% infinite maturity loan to plow into the market. That financial leverage gives him the ability to beat the market year after year - not his own stockpicking prowess.

If you were to start with $1B, then get an extra $2B that you never had to pay back, you too would do quite well holding Coca-Cola and other safe companies with moats. Your returns would be 3x everyone else's.

Buffett himself has tried to explain the impact of float on Berkshire Hathaway but it never seems to sink in with people.

I think by "actually not a great investor in the way people think", what you're saying is that he isn't a particularly outstanding stock picker. To the extent that that's the way in which people think he's a great investor, it's because lots of (most?) people think investing is just stock picking. But what makes him a great investor is exactly what you outlined. He found a great strategy - insurance float for leverage - and has executed it well for decades.

It seems weird to me to say, "he's not a great investor, he just found a great investment strategy and executed it really well!" What makes someone a great investor if not that?

That would be weird, but "he's not a great investor" is taken out of context from "he's not a great investor in the way people think". The way it would be said is "he's not a great investor in the way people think [stock picking], he's a great investor because he found this other strategy that works well."

What about he's "not a great investor in the way people think" leads you to believe "he's not a great investor"?

The average person is less likely to understand all the nuances of investing - and probably knows investing as stock picking.

Therefore, when they were told about Buffett, they automatically assume he's good at stock picking.

He's also a good marketer. I have a mostly unsubstantiated theory that Buffet's celebrity 1) allows him to negotiate better deals than other investors and 2) moves the market after he's invested. Re: 2) if Warren buys something, other people will pile on and drive up the price, which helps drive his returns.

He's mentioned the effect that Berkshire's brand reputation has on investment returns in his annual reports. It's substantial, but not in the way you theorize.

Basically, Berkshire's reputation for 1.) being financially stable through good times and bad 2.) keeping existing management and place and 3.) being able to allocate capital from cash-rich but growth-poor businesses to growth-rich but cash-poor businesses makes them a "preferred buyer" for many strong private companies that are seeking to get liquidity for themselves or family members but don't want to kiss their baby goodbye forever. That a.) opens up dealflow to Berkshire that would never think of selling to other private equity firms and b.) gives them a good price on the deal, since the owners are not seeking to generate a competitive marketplace of bidders that might drive up the price.

Although Berkshire does invest in regular public companies on the open market, that hasn't driven the majority of their returns in decades. Instead, their modus operandi is usually to buy 80% (there was some tax reason why it was 80%) of highly profitable private businesses, and then use the cash generated by those profits to buy more highly profitable private businesses. They only invest in the public markets when there are no attractive private opportunities available, and in some cases they take formerly public companies (eg. BNSF) private. The subsequent share price matters little with this strategy, because the investments are illiquid and just spin off lots of cash from profits.

Probably to some degree but you have to remember that to get to that point where that's even the case you have to do something right for a long time before that and during that period those particular benefits are non existent because the brand and celebrity hasn't been established yet.

> 2) if Warren buys something, other people will pile on and drive up the price, which helps drive his returns.

While this is technically true, in the long-run the price of a firm will reflect reality as it exists, not as its perceived. And since Warren doesn't buy, then instantly sell when the price goes up, but rather holds for a long time. I don't believe we can attribute his returns to this phenomena.

As a side note, the reason the price goes up is because he built a reputation of being able to pick undervalued stocks, therefore his purchase is a signal.

Znai nashix!!!

Spot on. I think a salary is also more or less like float, at least part of it. For that part, you are answerable to no one and can choose to invest it the way Buffett does. As much as people say that you can't pick stocks, you can, if you just stick to a very niche that you really understand, spend hours researching that niche, and invest for a really long term (> 10 years)

I was unaware of this additional advantage he has.

Reading up on floats it seems they are the money his insurance companies receive from premiums that has yet to get paid out in claims. Essentially a reserve that can be invested. Since they have a large scale of customers, this float ends up being rather high.

I'm wondering how much trouble an insurance company of smaller scale would get into if they used their float in such a manner but then ended up needing that money due to some natural disaster. Is this type of risk betting money you technically don't own similar to the 2008 housing crisis or the often talked about 1930's issue with everyone wanting to take their money out of the market?

Yes, the tricky bit is not losing any advantage the float might bring via underwriting losses.

It requires understanding risks very well and being willing to stop selling insurance (and losing market share) if the market for insurance gets too competitive.

Insurers typically don't insure for correlated risk (natural disasters, war etc) because no insurer actually has the reserves to pay it out.

Which is why water damage from a burst pipe will likely be insured but water damage from a flood is unlikely to be insured, even though from a homeowner's perspective they are effectively the same damage.

In addition to what sibling posters have said, insurers usually have their own insurance (called "reinsurance") that helps cover them in the event their claims exceed their cash on hand.

I would imagine, though, that reinsurers will price their premiums based on risk as well; e.g. if they know that one of their customers is parking too much of their float into risky investments, they might charge higher premiums.

Even before the natural disaster they'd get shut down by the regulators for having insufficient reserves if their investments did badly. Or in the case of Arron Banks underwriter Eldon Insurance you hang out with rich Russians and fund Brexit and somehow it's all good again.

Ill take it even farther: Buffet isn't statistically different than average. He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns.

A really interesting paper called "Buffet's Alpha" talks about this, and was able to replicate his performance by following a few simple rules. They found that he produced very little actual alpha. To his credit, he seems to have been observant enough to stumble into factors(value, quality, and low beta) before anyone else knew they existed, which is his real strength and contribution.

A summary of that paper from the authors is here: https://www.aqr.com/Insights/Research/Journal-Article/Buffet....

They work at AQR, a firm which is notable for being one of the only successful hedge funds to actually publish meaningful research.

The paper's conclusion is noteworthy:

> The efficient market counterargument is that Buffett was simply lucky. Our findings suggest that Buffett’s success is neither luck nor magic but is a reward for a successful implementation of value and quality exposures that have historically produced high returns. Second, we illustrated how Buffett’s record can be viewed as an expression of the practical implementability of academic factor returns after transaction costs and financing costs. We simulated how investors can try to take advan- tage of similar investment principles. Buffett’s success shows that the high returns of these academic factors are not simply “paper” returns; these returns can be realized in the real world after transaction costs and funding costs, at least by Warren Buffett. Furthermore, Buffett’s exposure to the BAB factor and his unique access to leverage are consistent with the idea that the BAB factor represents reward to the use of leverage.

BTW, AQR funded the initial development of pandas; which now powers tools like alphalens (predictive factor analysis) and pyfolio.

There's your 'compounding knowledge'.

(Days later)

"7 Best Community-Built Value Investing Algorithms Using Fundamentals" https://blog.quantopian.com/fundamentals-contest-winners/

(The Zipline backtesting library also builds upon Pandas)

How can we factor ESG/sustainability reporting into these fundamentals-driven algorithms in order to save the world?

"He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns."

Which is anything but average.

Compared to the S&P 500 going back to 1996, Berkshire Hathaway is up 845% vs 257% for S&P 500. Is this not a statistically significant result? (Or is there another average I should be looking at?)

I dunno. I find certain entrepreneurs often have life stories where they start making money around pre-teen or early teen years. I find those people to be at the tail ends of the distribution.

Buffett has been an amazing stock picker and used leverage.

In order to control for leverage, you typically look at volatility-adjusted measures of performance such as the Sharpe Ratio, not just absolute returns.

Berkshire's Sharpe Ratio from 1976-2011 was .76, vs. the S&P 500's .39. Even without the leverage, that's twice as good as the market.

Berkshire's Information Ratio during that time was .66, which definitely makes it an outlier: https://www.quora.com/What-is-Warren-Buffetts-Sharpe-ratio

More detail: https://www.nber.org/papers/w19681.pdf

Interesting point. Can you explain the 3x return using a concrete example ?

It's leverage, but like any leverage (even low cost leverage) it could as easily of sank the parent insurance company if he lost that money in bad investments.

Sure, today. But he had greater returns before he set up the float. (He's said they were greater because it's easier to find small overlooked bargains than big overlooked bargains - and when you're BH size, only huge investments will move the needle).

He made clever investments like buying American Express when others sold. (Other investors believed they'd lost trust due to fraud involving salad oil; but Warren verified that consumers still trusted their CCs).

He had a head-start: although he protrays himself as folksy, his father was a US Representative.

"He has specialized to an extreme and is taking advantage of the rewards of that specialization and natural talent in a unique way."

Gates is another one of those people where most forget that his grandfather was a multi-millionaire, his mother was a director at IBM, and he had access to one of the first computers in the world.

I.e. he is not an example of a self-made person, so anything he says is not really applicable to anyone looking to "make it."

P.S. The last paragraph is all I am saying - I have nothing against Gates.

How basic is required to qualify as self-made in a meaningful sense? I’m not talking about “Should he have grounded up sand and made his own chips and boards?” stuff, I mean lots of people have similar circumstances to Gates and made nothing of themselves.

As it happens the high school I went to, as a kid from a mostly lower middle class family with severe issues being able to pay attention in school in the eighties, had a lot of kids of rich families. These kids had everything - expensive cars at 16, huge houses, nice places to live, etc.

I have followed them along. It’s been 25+ years and basically none of them did anything with their lives, though to be frank I think they could certainly have been much happier and have had more experiences. The other misfits and I have done ok.

So Gates started from a better place and did far, far better than his peers. Does he not get credit for that?

I would agree that wealth shouldn't negate his accomplishments.

I think a lot of people who point out Gates' family wealth are reacting to the current political/ideological climate which would say "look, Bill Gates is self-made, so anyone can be!" neglecting the ridiculous enabling impact that enormous family wealth has, and shaming poor people for not being able to pull themselves up by their bootstraps.

>are reacting to the current political/ideological climate

Which climate are you referring to? The current climate in the US on the left is being dominated by the narrative that rich people are only successful because of their environment so they don't have the claim to their money that they think they do.

"Every billionaire is a policy failure" https://www.mediaite.com/uncategorized/alexandria-ocasio-cor...

This view is not a reaction to balance anything out, it's a policy position that billionaires should not exist because they do not deserve that much money.

I don't see talk of deserving things in your link, or of reasons for success. Someone could be both completely "deserving" of having received the income and "guilty" of "hoarding" it at the same time.

"The acquisition of that much wealth has bad consequences. A moral society needs guardrails against it."

"Moral society" isn't explored in that article, but "has bad consequences" is pretty far away from "isn't deserved." You can make a lot of policy-based arguments against extreme concentration - whether in a monopolistic company, a huge government, or in a billionaire - is a bad thing, overall, from various angles. And lots of people are making those different arguments. The "people are just lucky" argument is one, but I'm not seeing that one dominate my magazine and newspaper RSS feeds at the expense of any others.

You're claiming that 100 people in his position, would not do as well.

Therefore he was different. If it was simply a matter of self-made difference, all his peers could do that too. Which means whatever it is, is something he was born with.

Why does he get credit for being born different? Does he get credit for being male as well?

Either it's something any of his peers could do, and he's not special, so why praise him, or it's something nobody else could do, so he was born with it, and why praise him?

It’s been 25+ years and basically none of them did anything with their lives

Did any of them have the situation to be the provider of the dominant OS of the dominant computer platform of the last 30 years? Why do you think that isn't enough to account for "far, far better" all on its own?

Are you asking why he gets credit for making good choices with the opportunities he was given?

Yes.

Where do you think his ability and desire to "make good choices" comes from? Was he born with it - then why praise him? Or did he learn it - then why praise him instead of his childhood environment?

Why say that special results come from a special person, instead of saying that a special person comes from a special environment?

Why confuse "making money" with "good choices" just because you'd like to have a lot of money, even though lots of people were harmed along the way?

Most of the people I was referring to most likely had opportunities and backing exceeding young Gates, yes. But I don't think your point is reasonable. In your model, there appears to be nothing anyone can take credit for, effort or not.

And yet, can you point to the specific thing that he deserves credit for? Maybe my model is right, and there is nothing anyone can take credit for.

Why did he put in effort, and others didn't? Was he born to work harder, then why praise him? Or was he taught to work harder? Then why praise him. Given a choice of comfort or effort, he chose effort - why did he choose that and others didn't? Because he's morally superior? Then why is he, was he born that way or taught to be that way? And either way, why praise him for it?

The other complaint I have is your framing where "not earning one of the largest fortunes ever seen on the planet" is the cutoff for "did nothing with their lives" and then using that to scorn the peers who didn't. When do you see a discussion about how worthless Mozart's school peers were, or how Dostoyevsky's peers didn't write any good books?

The other other complaint is that writing a good book is something a person does, guiding money into their bank account is something a Capitalist does. Many people don't like DOS or Windows or SharePoint as a technology, don't like Microsoft's business practices, and don't like unbalancedly wealthy CEOs - which bit of that is the credit-worthy part? Making a successful computer company in the 1980-1990s with family wealth and connections and funding while breaking the law to stop competition is surely "playing on easy mode" if anything is, right? Where's the praise for the people who achieved a lot smaller monetary success, but did so against harder odds?

Gates' mother was on a charity board with the CEO of IBM, she wasn't a director at IBM. It was still a huge advantage.

The way you describe it, he kind of sounds like a person with Aspergers with business as his special interest.

Not saying that's what's going on. I don't know much about Buffet, but it sounds like some people with Aspergers I know that have other interests (mainly science).

Personally, reading about the same thing 8 hours a day sounds like a dream job to me.

Warren Buffet is an outlier among outliers. Clearly there are things anyone can pick up from his approach. I think I'd struggle to keep everything in my memory :-) but I think there is a lot to say about the kind of knowledge that one should seek to acquire. On reading I read also on Farnham Street that Charlie Munger reads quite broadly I wonder if it is the same with Mr Buffet

Same here, my memory is one of my worst attributes. If you ask me about tasks I've done last week, I might have trouble remembering them (or any details) without looking up Jiras.

I get the argument of compounding knowledge, though. It should still apply to someone with bad memory. For instance, if I know that I'll be switching my career in about 3-5 years, won't I throw away a great deal of my knowledge and skills? Why do something like this in the first place? This goes in the same direction as focusing yourself on one thing and one thing only (in your career).

I have previously concluded the same about him having Aspergers. From what I've read of him, he sounds quite strongly Aspy.

I greatly admire Warren Buffett. Sure, you wouldn't want to emulate a failed marriage or poor diet, but to me his positive qualities go beyond 'a lot of good'.

It's not his practice of reading income statements you may want to emulate - rather it's his focus and enjoyment of work.

It's his ability to ignore the naysayers and trust his own judgment - whether that be about the clothes he wears, the relationship he has with his wife, or the stocks he buys.

It's his approach of helping others - by explaining his investment decisions, supporting the Giving Pledge and of course by being so financially generous.

It's his approach to business - dealing honestly with employees, suppliers and shareholders, trusting others (eg. buying a billion dollar company on a handshake) and publicly admitting his investment mistakes. This contrasts particularly strongly with Donald Trump's approach to business.

And, you can get a lot of the benefit "for free" by just buying BRK.B shares, without all the pain of drinking cherry coke all day and reading SEC filings.

I'm not so sure thats true from a financial perspective, at least if you mean him being an outlier. The financial market should have priced in these benefits, that means you can expect only normal "market" returns from these shares. So you won't get them for free.

You haven't looked at a graph of the stock I guess.

I don't need to. Past performance does not predict future performance, thats one of the most basic lessons in stock investment. Also you have to compare the growth to an index to make a sensible argument, just looking at the graph won't really help me.

Reply on news.ycombinator.com