Warren Buffet's Kid Show [video]
online.wsj.com
online.wsj.com
Warren Buffett is, next to Taleb and a few others, my favorite modern thinker, and the clip seems to do him justice. It's ironic how his ideas are so simple they can be accurately presented in cartoon form. It's like reading the Intelligent Investor: business/investing isn't too complex, the hard part is executing on simple premises while keeping your emotions in check for the long term.
He would be a lot less irritating if he (1) didn't claim credit for ideas that aren't his and (2) stopped falsely disparaging people.
Buffett, on the other hand, is quite a bit more humble and grounded and provides stable, sage advice. He also credits people a lot more for the work they've done.
Taleb states "My central idea in The Black Swan is that: rare events cannot be estimated from empirical observation since they are rare. We need an a priori model representation for that; the rarer the event, the more the dependence on aprorism. Further, we do not care about probability (if an event happens or does not happen); we worry about consequences (how much total wealth or total destruction will come from it). Given that the less frequent the event, the more severe the consequence (just consider that the 100 year flood is more severe, and less frequent, than the 10 year flood), our estimation of the CONTRIBUTION of the rare event is going to be massively faulty (contribution is probability times effect; multiply that by estimation error) ; and nothing can remedy it. So the rarer the event, the less we know about its role --and the more we need to make it up with an extrapolative, generalizing theory. Hence model error is more consequential in the tails and some representations ARE MORE FRAGILE than others..... Nobody before has examined my problem in the history of thought, let alone systematize the idea of decision-making under certain classes of ignorance."
I am sure he would be excited if someone could show him that his idea is not original.
It was a great class - a similar insight Mr. Hawks helped me have is that there's much less of a difference between how people reason about $6 billion and $7 billion than between $5 and $500, even though the former is a much larger gap.
This stuff is common sense, and the con is probably older than modern civilization - the author tells you a neat tidbit of somewhat counter-intuitive reasoning, then pretends like he's endowed you with a secret which makes you smarter than most trained economists. You eat it up because you love the idea that you're smarter than economic experts. Bullshit.
Do you think he's the first guy to figure out that insufficient sample data in the tails of a leptokurtotic probability curve leads to a higher overall error term? Rather than some groundbreaking new theory of math, this is material covered in freshman econometrics. I'm just asking that he admit this when he boils it down to an enjoyable read.
EDIT: the concept of kurtosis was apparently at least named in 1905, over a century ago, by German mathematician Karl Pearson.
When basic financial tools and theories are based on assumptions that are Just Plain Wrong, it makes you question the gigantic stack that has been built on top of them.
It's easy enough to dismiss this stuff as worrying about edge cases, but these edge cases occur more often than the theory dictates, and unfortunately, people underestimate their impact.
Taleb argues that these tools aren't being used in the real world, but all the evidence in places like the options market seems to indicate otherwise: options get way more expensive (from a lognormal perspective) the deeper in/out of the money they are, primarily because there are fat tails already being modeled into the price. And given that options market data, it's tough to see how going long on Black Swans will fetch a good Sharpe ratio--which wouldn't be the case if it were true that everyone were slaves to normal distributions.
I would say going long on Black Swans is more of an insurance policy unless you are a VC. As the Taleb advised Universa Investments L.P. sells itself as "an investment management firm that specializes in hedging tail risks for its clients. Universa has a focused investment approach employing positively-skewed payoffs, empirical and fundamental-based option valuation, and order flow trading."
He writes from his head. He doesn't go digging through books looking for choice quotes to sprinkle throughout the text and make it appear more intelligent. I don't care if his ideas come from a lot of different sources. He synthesizes them very well.
The alternative way of writing really irritates me now. For instance, I was just reading "Poverty in America". The book literally starts by saying something like:
-In 1979 the government official in charge of fighting poverty in America stated, "Poverty will be extinct in 10 years." But it hasn't happened...blah blah
The whole book starts with some quote that is so shaky. Who is this guy who said it? Was he sober or drunk when he said it? What was the context? What did he mean by "extinct" and "poverty".
I love Taleb because he doesn't just snatch things out of context to help bolster his arguments. He thinks up his own stuff. He puts everything in his words. If you don't understand something enough that you can't fluidly describe it in your own words, you shouldn't be writing about it. I think PG's essays also are almost entirely in his own words, which is one of the reasons why they are generally so logical and clear.
Also, the disparaging is well deserved IMO. I think it's more than warranted to disparage people who don't understand statistics who are supposed to. At the very least, people who understand stat/prob should take themselves much less seriously than they do. I know it is very hard to always speak with correct probabilistic language, humans are programmed to speak in stories and not probability, but there should be a greater acknowledgement of this by financial, media, and other professionals. Until that happens disparage all you want.
He takes 0 and 25 and the 25 only if he makes a profit beyond what a conservative investment would. Something like 8% per anum, not sure, the exact number is not important anyway.
But your typical hedge fund takes 2 and 20, that's even if they do nothing or lose money.
Now here's where it gets interesting. There are literally hundreds of those funds. Doesn't that suggest a massive pent up demand for investment?
Source: How to Pick Stocks Like Warren Buffett, pg. 11.
As long as they are getting Buffet, why not create a more concrete series. I dunno, how about each episode he'd take a company to examine for investment, and talk about all the pros and cons that he sees, while teaching the rest of us about what to look for in our own investments
In the video he even mentions that the candy business is good because the maintenance capex is relatively low (he didnt phrase it like that, but that's what it is) and that profits really only need to be plunged into advertising (basically an example of a high ROIC business since its not very capital intensive).
He's mentioned all of this before in the Berkshire Hathaway shareholder letters -- this is kind of the same thing but in cartoon form. So as a teaching tool, it's pretty good. If you really want more, dig up his partnership letters.
From http://ycombinator.com/newsguidelines.html
> If you submit a link to a video or pdf,
> please warn us by appending [video] or
> [pdf] to the title.With these qualitative factors settled, you can look at the numbers, especially the rate of growth of profit, and assume that they will continue (taking into account how sure you are of this), and calculate what the business is worth based on extrapolating that growth. Extrapolation is easy.
As a contrast, consider companies during a boom. Explosive growth, even in profitability, but... Another contrast is high tech companies, which can be extraordinarily profitable, but their long-term success has proven hard to predict. Buffett says he won't invest in something unless he understands it - as a programmer, this is great to hear from someone who is so incredibly successful.
Now you know the secret. When your grandkids ask you how you became so rich, you can tell them: "it was all because of 10ren".
BTW: Thanks for reminding me of all this! Now is the best time to buy stocks. They're on special.