From: gts (gts_2000@yahoo.com)
Date: Sun Jun 15 2003 - 16:45:29 MDT
Brett Paatsch wrote:
> I haven't been following all of this thread but I'd be
> interested to hear what you point view on Warren Buffet would be.
He's way out on the end of the bell curve. Unfortunately for every Warren
Buffet there is a Warren Not-So-Buffet who lost his shirt with an equally
reasonable strategy.
It is only in hindsight that we can say what strategies were really "wise"
over any given time period. We don't know what the future holds.
The biggest obstacle for most people is understanding the nature of risk,
and how it relates to returns. Warren Buffet has done very well, but not
nearly as well as people think after we factor in the risks he incurred to
get those returns. Companies whose shares trade at low price/earnings ratios
and low price/book-value ratios (Buffet's favorites) trade at low multiples
for a very good reason: they are troubled companies with dim business
prospects. In *retrospect* the economy has done phenomenally well in
Buffet's experience, such that these companies did not go bankrupt as often
as they otherwise would have, giving the impression that his investments
were not as risky as they were in reality and allowing him to show a
superior return. Unfortunately we cannot say with any certainty that the
economy of the future will be as kind to Buffet imitators as it was to
Buffet.
>... but do you really think the Warren Buffet's
> success is a mere statistical phenomenom. It could have been
> anyone and just happened to be him?
>
> Is this you contention?
Yes.
> In fairness it would seem that the
> bias against the view that such strategies could exist might
> appeal to one that has not stumbled across a particular
> strategy as well. So I guess the fair question is in what way
> are the alternate hypothesis falsifiable? How could you rule
> out all strategies rather than merely those that you may have tried?
Strictly speaking, I am saying that there is no evidence that any strategies
exist to outperform the market after adjustments for risk and after
considering transaction costs.
I am saying also that, given that lack of evidence, and given the many
failed attempts by academics and other objective observers to the find that
evidence, it is most rational to accept as our working hypothesis the
hypothesis that the market is an efficient pricing mechanism.
To say that the market is efficient is to say that the best estimate of the
intrinsic value of any given company at time t is reflected by the price of
its shares at time t, and that to the extent there is any pricing error at
time t, that error cannot be exploited systematically.
> Aside: I am often mildly amused at the statements of people
> who by bizzare acident find themselves sitting up in
> hospitals describing themselves as very lucky because they
> narrowly avoided a still worst fate.
That always make me laugh too. :)
-gts
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