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Is Warren Buffett Brilliant or Lucky?
Posted by: guruek (IP Logged)
Date: May 7, 2009 03:06PM

After a successful investment career that produced an indisputable track record, Warren Buffett still couldn't fend off all the doubters. I find this piece from theatlantic.com. Comments? Anyone?:

Warren Buffett began his investment career in the 1950s, just as the era of maximum structural advantage for investing in low-P/E markets began, and has conducted his entire investment career in such an environment. Now, there are lots of value investors, and only one Warren Buffett; his implementation of this investment philosophy is clearly extraordinary. But would he have been as successful had he been investing in the first half of the 20th century (or, potentially, in some future period with different characteristics)? In other words, is an orientation to value investing inherent to Warren Buffett's hardwiring - in which case his luck is not flipping a million coins in a row the right way, but is instead the one lucky event of being born into an investment era matched to his inherent nature - or does his investment capability operate at a yet-higher level of abstraction that would have enabled him to develop and deploy a different non-value-based investment philosophy had he been investing in a different era? That's the $64 billion question. Given his age, it's unlikely that we'll ever have a definitive answer.


Continue to read the complete article by Jim Manzi






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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: ConsumerMonopoly (IP Logged)
Date: May 7, 2009 03:28PM

Superinvestors of Graham and Doddsville provides the answer to the question posed in this article in my eyes.



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: AlbertaSunwapta (IP Logged)
Date: May 8, 2009 12:05AM

The "Superinvestors" were all starting out with Graham's teachings at the same time so that doesn't address the historical perspective issue.

Buffett has already ascribed his wealth to starting at an early age, and he has mentioned the advantage he enjoyed by being born in the US and not somewhere else, as well Buffett has discussed in detail the overall advantage postwar investors had where the US market could be had at near or below book value. Nonetheless, all young, trained investors and funds - at that that time - enjoyed that same advantage yet even then Buffett was frequently beating the market over different measures of time. (He was also wise to structure is partnerships to collect a good percentage of his outperformance and in later years with BRK, to buy up ownership stakes that his partners were dumping.)

However, I think the quote above is pointing towards the general confusion of investing as coming from either the value (low P/E) or growth camps, whereas Buffett himself has said that they are two sides of the same coin. He wasn't necessarily a pure advocate of low PE investing. (i.e. It's much harder hard to grow rich buying growth at overpriced levels or by buying "value" that doesn't grow.)

Lastly, I'd say Buffett didn't start at a time of "maximum structural advantage..." as I believe that time would have been a few years earlier, during the depression and during the war, when any accumulation of very depressed shares would have returned an even higher absolute portfolio value/return. Yet Buffet's returns apparently outstripped any investors starting their careers at that time.






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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: kfh227 (IP Logged)
Date: May 8, 2009 09:24AM

I stopped reading about 3 lines in after reading this gem:
"just as the era of maximum structural advantage for investing in low-P/E markets began, and has conducted his entire investment career in such an environment"



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: Sivaram (IP Logged)
Date: May 8, 2009 10:33AM

Most value investors and Buffett fans will dismiss the argument given in that article; but since I'm not a value investor, I do think about it.

First of all, I disagree with the notion that Buffett's skill can be questioned. Since Buffett outperformed others by a huge margin, regardless of whether the economic backdrop was good or not, he actually has skill. Some people make a lot of money simply being in the right place (e.g. real estate investors during a real estate boom) but they have no skill. Buffett doesn't fall in that camp. The only ones disagreeing on this point are the efficient market supporters (such as the the author's colleague who is being referenced, Megan McArdle). I definitely do not believe in efficient market theory (especially the strong form) and think skilled investors such as Buffett can beat the market.

What is debatable is the following question posed by the author: "But would he have been as successful had he been investing in the first half of the 20th century (or, potentially, in some future period with different characteristics)?"

I'm not an expert on Buffett but my opinion is that Buffett probably won't have done as well in other periods of time. He will likely outperform the market but the returns won't be as high. There are a couple of reasons in my opinion.

The first thing to consider is the fact that stock market returns since 1950 is much higher than it was before 1950. You can refer to the top chart in this post I made on my blog a while ago to see how rolling 10 year returns from 1950 to 2005 is much higher than from 1900 to 1950. From 1900 to 1950, rolling 10 year returns never went above 10%, except during the Roaring 20's. In contrast, perhaps as much as half the time since 1950 produced rolling 10 year returns above 10%.

One of the main reasons for the low return in the first 50 years of the 20th century was due to a huge bear market in stocks from the late 1800's to 1920. Then, even though the bull market in the 1920's was the largest in American history, most of the gains were wiped out during the early 30's.

Having said that, the situation is more complex than it seems. The early 1900's had periods of deflation (because of the gold standard) wheres inflation has been the norm for the last 50 years. So it's not clear to me how bad the returns in the early 1900's (which never crossed 10%/year) compares to the last 50 years (when returns often crossed 10%/yr). But if real returns in the early 1900's was simialr to late 1900's, would Buffett have done as well in the early period (which was deflationary)?

On the topic of deflation, if Buffett and value investing were to perform poorly, it will be due to deflation. If one of the summaries of Seth Klarman's book is correct, Klarman actually says deflation is a dagger to the heart of value investing (you can read a post on my blog on this). Value investors probably have their own opinion on how true this is, but the way I look at it, like most things in life, value investing must have an achilles heel. I suspect it is deflation.

So the question is, would Buffett do as well if he got bouts of deflation? I suspect the answer is no, if his strategy doesn't change much from the last 50 years. Most of what Buffett invests in has an inflation bias. For instance, some of his core investments were branded consumer goods that can largely increase prices continuously without much backlash. Would these companies do as well if prices stabilized or declined? Some of his other big investments are in utilities and these will probably perform poorly in deflationary periods (mostly because debt obligations will remain high while pricing power will be weak, especially if regulators are unwilling to raise prices given how prices of other goods aren't rising.)

I suspect that the superior performance of low P/E stocks in the original article is actually heavily influenced by inflation. This is just my guess but that's how I see things.


So to sum up, Warren Buffett is skilled and one of the greatest investors of all time. But I think his performance will be much weaker if he were living in the late 1800's to early 1900's period.

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: AlbertaSunwapta (IP Logged)
Date: May 8, 2009 09:26PM

Grantham recently said the 'value' did poorly in the deflationary 30s with about half of the companies going bankrupt. I'd say whatever standard measure of 'value' Grantham is using - it must differ significantly from Benjamin Graham's measure of 'value'.

Additionally, Buffett started with Grantham and modified his approach for a number of reasons and the timing of that evolution may have added to Buffett's success. Maybe his thinking evolved along with the environment and if so, then he may have done equally well in other environments.



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: Sivaram (IP Logged)
Date: May 8, 2009 09:56PM

AlbertaSunwapta Wrote:
-------------------------------------------------------
> Grantham recently said the 'value' did poorly in
> the deflationary 30s with about half of the
> companies going bankrupt. I'd say whatever
> standard measure of 'value' Grantham is using - it
> must differ significantly from Benjamin Graham's
> measure of 'value'.
>

Do you have a reference to Grantham's article? Is it the latest shareholder letter? What you say sounds kind of familiar but I don't remember the specifics of what Grantham was saying.

I don't know what Benjamin Graham's definition of value is, but he personally got crushed during the stock market crash that started in 1929. I suspect even the strategies he suggested after he formalized his views after the crash will not do that well during deflation.

Anyway, Buffett is not a pure value investor; he is far more of a growth investor than many value investors claim. Nevertheless, I think his value bias will make life difficult if asset values keep falling.

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: AlbertaSunwapta (IP Logged)
Date: May 8, 2009 11:46PM

Regarding my the Grantham recollection - I may have misrepresented Grantham words....

Google GMO, depression and "massive value wipeout" for the actual commentary.



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: AlbertaSunwapta (IP Logged)
Date: May 8, 2009 11:55PM

My guess is that Buffett, employing Graham's teachings may have done even better than he actually did, had he been let loose in the earlier periods, as it was for those conditions that Graham developed his conservative risk adverse analysis. And depending on when Buffet could have started, he might even have been around to avoid the 1929-30 collapse as well, and then been able to really pick up undervalued situations.

We can't assume that Buffett's current multi-decade market beating performance is his highest potential performance. He seems to have had the ability to apply uncommon 'common sense' in many economic environments over the past six decades. Personally, I wouldn't even be surprised if he's working on becoming a billionaire again - using his personal holdings, having gifted his Berkshire Hathaway holdings. Remember, he said he thought, no he knew he could make 50% a year these days... :-)



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Re: Is Warren Buffett Brilliant or Lucky?
Posted by: Altmanva (IP Logged)
Date: May 9, 2009 07:19AM

I've studied Warren for about 20 years so I'm a newcomer compared to many of you but I have a suspicion that he is a much better businessman than he is an investor. The brilliance of Warren is to develop a business model which feeds the investment portfolio and allows him to increase his exposure to equities when others are liquidating in order to fund client redemptions. Furthermore, Seth Klarman has things completely backward. If the psychology of deflation takes root Warren will be able to buy even growing businesses for extremely advantageous prices.

Another issue I have with the articles decribing Warren's performance is that I can only figure out how the book value of Berkshire has increased over the years. I don't think Warren shares his trade blotter with anyone so getting a handle on his pure investing ability involves diving into SEC disclosures which are not complete enough to develop an AIMR performance figure.



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