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#1
06-19-2006, 04:58 PM
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Re: Benjamin Graham, on Security Analysis, and the Efficient Market Th
[ QUOTE ]
Buffet - who stayed out of the internet bubble - did not, to my knowledge, figure out a way to profit from it. BTW, according to Buffet's recent newsletter, he's beat the market in all but 6 of the past 40 years. That's a pretty frikken good record. According to my - possibly entirely inaccurate calculations - the chances of doing that well or better is only about 1 in 25,000. [/ QUOTE ] Buffett doesn't believe in shorting, so he couldn't take much advantage of the Internet bubble. But there was a huge over correction afterwards, and he made some large profits from junk bonds and specifically from providing very high yield debt to Level 3 Communications. He also was able to make substantial profits during the 1987 crash caused by irrational portfolio insurance, and during the 1970s bear market. It's not all bubbles, irrationality works both ways. And 1 in 25k radically understimates the likelyhood of Buffetts results being from pure chance for several reasons. First, if you include the Buffett Partnership, he's actually something like 44 out of the last 50 years. And he didn't beat the market by a slim percentage, he's whipped it. A guy who's averaging 1% better than the market is much more likely to be lucky than a guy who's doubled the market's returns. For example, assume you find an investor who trails the market two out of every three years. But overall, his cumulative results beat the market by about 20% a year because his good years he crushes the market, and his bad years he only trails by a little. If he does this for twenty five years he's clearly a skillful investor. Of course an EMT guy would agree, but say it doesn't matter because it's too late, the guy is either close to retirement, or managing too much money now to be able to outperform. Beating the market x years out of y isn't a good measure. Cumulative performance is the best way to look at an investors results. 
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#2
06-20-2006, 01:00 AM
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Re: Benjamin Graham, on Security Analysis, and the Efficient Market Th
I agree with you. If anything, the extent to which he's out-performed the market is even more impressive than his consistency.
Buffet had this to say in his 1999 report: [ QUOTE ] Please note that I spoke of hoping to beat the S&P “modestly.” For Berkshire, truly large superiorities over that index are a thing of the past. They existed then because we could buy both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us today. Our optimism about Berkshire’s performance is also tempered by the expectation — indeed, in our minds, the virtual certainty — that the S&P will do far less well in the next decade or two than it has done since 1982. A recent article in Fortune expressed my views as to why this is inevitable, and I’m enclosing a copy with this report. [/ QUOTE ] I haven't found the Fortune article, yet. :-( His observation - that securities were more attractively priced earlier in the twentieth century that they are today - seems like an accurate one to me. And it has some discouraging implications for people who take historical market returns as an indication of what we should expect in the future. I'm curious what you think.
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#3
06-20-2006, 01:13 AM
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Re: Benjamin Graham, on Security Analysis, and the Efficient Market Th
[ QUOTE ]
His observation - that securities were more attractively priced earlier in the twentieth century that they are today - seems like an accurate one to me. And it has some discouraging implications for people who take historical market returns as an indication of what we should expect in the future. I'm curious what you think. [/ QUOTE ] There are two different issues here. One is that he's gotten too big to take advantage of the areas of biggest mispricing, which occur in smaller cap stocks. I think that's most of his performance return decline. To be sure, with computers and great knowledge, he's probably right that in absolute measurements there were probably more opportunities a few decades ago than now. But from my vantage point, in the smaller end of the market there are still enough mispricings to make it worthwhile for the enterprising investor. If I remember his S&P 500 article I think it revolved around PE ratios and implied yields. By 1999 the market had gotten so expensive (eventually PE's reached around 35 or so) that he felt it was clear that the average PE would have to decline, ergo, lower returns in the future. And he has so far been proven right. My guess is that we still haven't gotten all of it out of the system. I believe the typical PE historically has been around 15, and that the S&P is still a little higher. There are some counter arguments that our more attractive tax rates mean make higher PEs reasonable, so maybe the new median is 20, which would imply a brighter future. I don't spend much time worrying about any of it. I don't buy many big caps, and I just worry about the PE and value of the particular stocks I'm buying today, not what's happening in the vast universe I'm not buying. Best of luck, dc.
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