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Warren Buffet: Luck Or Skill?
Bill Bonner: The King of Lydia: “Count no man happy until he be dead,” said Athenian statesman and poet Solon.
The man to whom Solon gave the advice was the richest man alive at the time (the 6th century B.C.) – the king of Lydia, Croesus.
Croesus considered himself to be the happiest man alive. But he discovered that fortune could turn against you, no matter how rich and powerful you were. His son died in an accident. His wife committed suicide. And he was captured and burned alive by Cyrus, king of Persia.
And now, poor Warren Buffett must be feeling the heat. He’s 84 years old and the most successful investor of all time. Respected. Admired. Beloved, especially by the thousands of people he has made into millionaires. And “as rich as Croesus” himself. Buffett celebrated the golden anniversary of his investment conglomerate, Berkshire Hathaway, last week. And what a success!
Croesus and Solon , painting by Gerard van Honthorst, 1624
He turned every dollar invested in 1965 into $182,616 today. For 30 years, he never had a 10-year compound annual gain of less than 20%. Over 50 years his compound annual gain has been 21% – or just over twice that of the S&P 500, including dividends.
And now, Berkshire is worth $367 billion and has $195 billion in annual revenues.
If money were what really matters, Warren Buffett would have no peer. He has had unparalleled success in this world; surely he has a first-class ticket to the next. And if his good fortune were of his own making, what would he have to fear?
Skill or Luck?
But what if fortune, which smiled on him so broadly for so many years, begins to frown? That idea was raised back in 1984 on another 50th anniversary – the half-century mark following the publication of Benjamin Graham and David Dodd’s classic book on value investing, Security Analysis.
The occasion was used for a debate. On one side was Michael Jensen of the University of Rochester, a leading proponent of the Efficient Market Hypothesis (EMH). (In a nutshell the EMH states that investors can’t get above-average returns without taking above-average risk.)
Jensen argued that Buffett’s success was a matter of chance. On the other side was Buffett… who argued that skill, not luck, was behind his, and a select group of value investors’, impressive track records. Jensen began by pointing out that when you have a nation of coin flippers, a few – by sheer dumb luck – are going to get a long string of heads… and therefore be viewed as “winners.”
Yes, said Buffett, but if all of those who were getting heads were all using the same technique (value investing) it should make you wonder. It would be as though there were a town where no one ever got cancer: You’d want to know what they were having for dinner.
Buffett – who had been a student of Graham at Columbia Business School – attributed his early success to the aforementioned Security Analysis as well as Graham’s 1949 book, The Intelligent Investor. The Intelligent Investor was at least the Old Testament part of Buffett’s investment bible. He was to write the New Testament himself, fulfilling the prophecy laid out by his mentor.
“He who comes after me comes before me,” Graham might have said… had he realized what his young acolyte from Omaha would achieve.
Meet professor Jensen, who insists that Warren Buffett just got lucky. It is only marginally surprising that he is a professional economist rather than an investor or an entrepreneur, but one cannot dismiss his ideas out of hand.
Screenshot via georgetown.edu
Dating or Marriage?
As Buffett explains in his 50th letter to Berkshire Hathaway shareholders, Graham taught him “cigar butt” investing. The idea was to find troubled companies (with declining margins, an obsolete business model or overhanging litigation)… buy them ultra cheap… and have “one puff” on them as they rose back to fair value. That worked beautifully, for many years.
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Source: http://marketdailynews.com/2015/03/07/warren-buffet-luck-or-skill/
