Monday, August 19, 2013

Warren Buffett, age 44, explains the futility of playing the market




In 1975, shortly after joining the board of the Washington Post Company, Warren Buffett wrote a letter to the chairman and chief executive, Katherine Graham. He had some advice as to how the company should invest its pension accounts.
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All 19 pages were recently published by Fortune, and are well worth reading. In the brief excerpt below, Buffett, then just 44 years old, makes a succinct case against traditional stock picking and fund management. We’ve highlighted some passages, and you can annotate the text by hovering over any paragraph and clicking the quote bubble off to the right.
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If above-average performance is to be their yardstick, the vast majority of investment managers must fail. Will a few succeed due either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance just as would be the case if l,000 “coin managers” engaged in a coin-flipping contest. There would be some “winners” over a 5 or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly “successful” records—who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)
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It may be possible, if you know a good deal about investments as well as human personality, to talk with a manager who has a decent record and find that he is using methods which really give an advantage over other investors, and which appear to be likely to provide continued superiority in the future. This requires a very wise and informed client—and even then is not free from pitfalls.
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It just doesn’t work that way.
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Down the street there is another $20 billion getting the same input. Each such organization has its own group of bridge experts cooperating on identical hands and they all have read the same book and consulted the same computers. Furthermore, you just don’t move $20 billion or any significant fraction around easily or inexpensively—particularly not when all eyes tend to be focused on the same current investment problems and opportunities. An increase in funds managed dramatically reduces the number of investment opportunities, since only companies of very large size can be of any real use in filling portfolios. More money means fewer choices—and the restriction of those choices to exactly the same bill of fare offered to others with ravenous financial appetites.
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In short, the rational expectation of assuring above average pension fund management is very close to nil.
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The entire memo can be read at Fortune. The 1962 image of Buffett is from an interview with an Omaha, Nebraska, television station, KMTV.
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No comments:

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.