My favorite part of his history in business is how the company whose name he eventually adopted for his whole operation (Berkshire Hathaway) was actually one of his self-admitted stupidest acquisitions, one based on vengeance rather than strategy. Seems like an unspoken bit of advice from him: name your company after your biggest fuck up, so you'll never forget you're only human.
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.
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)?
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.
A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition.
The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid.
The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis.
They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills.
When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same.
Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive.
You should really investigate the situation fully before blindly believing the story the media has sold to you.
How can nothing change for the end user? If the insurance company is picking up the tab, then the cost of insurance has to rise and/or the insurance benefits have to be cut (i.e. drug is no longer covered or co pay rises).
Well, the good thing about Daraprim, the drug for toxoplasmosis, is that it completely cures you of the condition. So sure, your insurance will rise because you made a claim, but it won't raise that much, since you don't have any medical conditions going forward.
Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.
The company going out of business would almost certainly not mean the drug would stop being available. The company's assets would have to be liquidated and the rights to the drug would be bought by another company. Hopefully one that is a little better at managing their expenses such that they don't put themselves into similar "price gouge or die" situations.
When you hear him speaking publicly you can understand the guy is a douche just by personal judgement without even needing to be influenced by the media.
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!
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.
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?
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.
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.
"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."
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.
If you click through to the original article[1] linked by the blog post, they explain that
> Warren Buffett became a player in the investment game at the wee age of 11, eventually using cash he earned from his paper route to buy some farmland in his home state. As a high school sophomore, he also reaped the rewards of a booming pinball machine business.
Yeah, I know it's adjusted for inflation. I guess they explain it? I can't imagine a paperboy earning nearly $60k (adjusted) in a couple years, so his investment returns must have been phenomenal right off the bat.
A high school sophomore would be 15-16, so he would have already made the $67k (adjusted) before he got into the pinball business.
That figure seems slightly exaggerated, Wikipedia states he had $9800 saved when he was 20. And that he made $175 a month from his postal route. If he started his paper route at 15 he would have made over $10,000 from just the paper route during those 5 years. And the article lists several more business ventures he was active in.
Few people start working as early as 13-14, but if we extrapolate the $175 a month (which would be almost $2500 in today's dollars), and you had no expenses you could save $150,000 by the time you were 20, today.
Must surprising here is how well paid that paper route was. Average salary was $200 a month in 1944. Today the average salary is $2500 a month, but you can't earn as much from such a simple job today.
I remember going through some of my refrence books. I was deciding which one's to toss. I opened Encyclopedia of Psychiatry (vol. 1 and 2).
The first page I flipped to said, "A man of 50 will not make anymore money than he is currently making in his life." It was just so specific, or I I got the quote wrong? I recall looking at it a few times. It was personally depressing because I was broke, and hitting 50.
To this day, I think about that sentance, supposedly extrapolated from years of statistics.
Well, even though most of the wealthy people I have pesonally interacted with had the likability factor of a boat anchor; Warren Buffet seems like one of the wealthy the others should try to emulate. He is one of the guys I secretly root for.
These days doesn't he transfer quite a bit (5%ish ?) into Gates' trust every year? Does that still count as 'his' for the purposes of this graph or is it deducted?
To me the biggest anomaly here is the four year period from 1956 to 1960, 26 to 30, when Buffet octupled his net worth from $1M to $8M. Plenty of silicon valley engineers will have a net worth of $1M, but I think few make it to $8M. What was Buffet doing during those magical 4 years?
On the chart, the preceding few years have a very similar slope. One possible explanation is that he entered his 20s after all, and you might imagine that he started being taken more seriously in his business ventures when compared to the preceding period (i.e. it is possible the growth looks really huge when starting from a small base)
Leverage is one big thing. Buffet is a money manager, so he takes outside money, and make money off of that. Most of Silicon Valley engineers won't do that. 1956 is when he started taking serious outside money.
Buffet's approach of combining high leverage with low growth 'value' equities is a large part of his great performance. This is not to say there isn't a skill in noticing the benefits of this approach and convincing creditors and investors to let you take on all the debt, but a surprisingly small proportion of these gains are due to stock picking.
Yes, the disaggregation used in the linked paper is robust. You're welcome to critique it if you find a specific error.
There are often leverage restrictions for financial products sold to individuals and even beyond this people are often wary of them. He is incredibly skillful in gaining the trust of investors and running an efficient mortgage operation as well as having a moderately good stock picking record.
Buffett actually has very little debt. Most of the leverage comes from insurance float - when you buy insurance with GEICO Buffett invests the money until you crash.
We both experienced inflation, but sure, let's work it out:
£50 when I was 14 was worth £90 in today's money. Buffett's $5k was $68k.
Buffett's age-35 7M was worth 53M in today's money. So I'd need £70k in today's money to match his net worth growth.
That's exactly the same. I'm actually surprised by this, as it suggests both Buffett and I experienced the same level of compound inflation over the 20 years of our lives from age 14, despite being at different times and on different continents.
The most interesting thing is that y-axis is exponential. iIts humbling that Buffet didn't even crossed 100M mark when he was 40! While wealth accumulation seems to be exponential, it's sure a long winding road.
> Comparing yourself to others and especially to the best performer ever in your skill/expertise is unhealthy. Don’t compare yourself to others.
And yet here I am anyway, nearing almost 30, still in graduate school, wondering if I'll ever know what it's like to have a reasonable amount in savings, let alone a "net worth" :)
I've only started caring about money a couple of years ago, so no point comparing 14-year old me with anyone in terms of money.
What gets me is how much more creative successful people were when they were young. Fishing and re-selling golf balls? Pinball business?? When I was 14 I was too busy with computer games.
66 comments
[ 2.8 ms ] story [ 133 ms ] thread[1] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
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.
1. http://blogmaverick.com/2013/01/10/the-stock-market-2/
A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition.
The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid.
The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis.
They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills.
When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same.
Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive.
You should really investigate the situation fully before blindly believing the story the media has sold to you.
Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.
http://www.bloomberg.com/news/articles/2016-05-19/the-real-r...
What he has done (twice) is find a niche drug whose supply could be constrained (thiola @ Retrophin and daraprim @ Turing) and gouged the price on it.
Claims to being interested in R&D were nothing but public relations.
You should read the SEC complaint against him (https://www.sec.gov/litigation/complaints/2015/comp-pr2015-2...). Not the type of person I want to consort with.
https://en.wikipedia.org/wiki/Pyrimethamine
When you hear him speaking publicly you can understand the guy is a douche just by personal judgement without even needing to be influenced by the media.
Buffett directly answers this question
http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....
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.
http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...
Got it.
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.
If you click through to the original article[1] linked by the blog post, they explain that
> Warren Buffett became a player in the investment game at the wee age of 11, eventually using cash he earned from his paper route to buy some farmland in his home state. As a high school sophomore, he also reaped the rewards of a booming pinball machine business.
1. http://www.marketwatch.com/story/from-6000-to-67-billion-war...
A high school sophomore would be 15-16, so he would have already made the $67k (adjusted) before he got into the pinball business.
Few people start working as early as 13-14, but if we extrapolate the $175 a month (which would be almost $2500 in today's dollars), and you had no expenses you could save $150,000 by the time you were 20, today.
Must surprising here is how well paid that paper route was. Average salary was $200 a month in 1944. Today the average salary is $2500 a month, but you can't earn as much from such a simple job today.
A nice way to think of it is that a linear line on a logarithmic axis would look exponential on a linear axis.
The first page I flipped to said, "A man of 50 will not make anymore money than he is currently making in his life." It was just so specific, or I I got the quote wrong? I recall looking at it a few times. It was personally depressing because I was broke, and hitting 50.
To this day, I think about that sentance, supposedly extrapolated from years of statistics.
Well, even though most of the wealthy people I have pesonally interacted with had the likability factor of a boat anchor; Warren Buffet seems like one of the wealthy the others should try to emulate. He is one of the guys I secretly root for.
Then there is early luck and talent.
http://www.valuewalk.com/2015/05/warren-buffett-partnership/
http://xqdoc.imedao.com/150c22613c69373fe2602a80.pdf
There are often leverage restrictions for financial products sold to individuals and even beyond this people are often wary of them. He is incredibly skillful in gaining the trust of investors and running an efficient mortgage operation as well as having a moderately good stock picking record.
At 34, his net worth was $7M, so relatively speaking, I only need £70k to be doing about as well as he was.
I think I'm actually doing better. :-)
£50 when I was 14 was worth £90 in today's money. Buffett's $5k was $68k.
Buffett's age-35 7M was worth 53M in today's money. So I'd need £70k in today's money to match his net worth growth.
That's exactly the same. I'm actually surprised by this, as it suggests both Buffett and I experienced the same level of compound inflation over the 20 years of our lives from age 14, despite being at different times and on different continents.
(This is all tongue-in-cheek, of course).
http://www.businessinsider.com/how-a-young-warren-buffett-ma...
And yet here I am anyway, nearing almost 30, still in graduate school, wondering if I'll ever know what it's like to have a reasonable amount in savings, let alone a "net worth" :)
What gets me is how much more creative successful people were when they were young. Fishing and re-selling golf balls? Pinball business?? When I was 14 I was too busy with computer games.