The 2+2 Hedge Fund

[David Sklansky]

"One last thing. You cannot beat the market Mr. Sklansky. You cannot beat the Wall Street mediocrity. If you really could, you would do it."

I won't comment on that anymore. But I would like to bring up again your statement that the mutual fund managers who are only average because they have to pick 30 stocks would beat the averages easily if they could pick their best five. If you changed the numbers to 100 and 2 you could conceivably be right. But any smart person realizes that what you said almost can't be.

[maurile]

[ QUOTE ]
Why are so many people saying this? It is my understnding that he is the best when it comes to investing big boney, long term, in big companies. Since he has such a huge bankroll I understand that he has little choice. But why should that mean he would be so great at options, short term trades, hedging, going short, picking out good longshot bets in small companies, or any of the other strategies that many people tell me can, if done right, beat the 25% a year or so that he makes.

[/ QUOTE ]
His philosophy is to buy companies that are substantially undervalued, and to hold them until they're no longer substantially undervalued. (Preferably, forever.)

This has worked better -- in the sense of producing greater returns over longer periods -- than any other strategy has, including "options, short term trades, hedging, going short," etc.

If you really think it's true that "options, short term trades," etc. can have an expected return greater than 25% (as distinct from short-term results greater than 25%), why hasn't anyone (to my knowledge -- corrections welcome) averaged better than 25% over the past 30 years using those instruments?

And as for "picking out good longshot bets in small companies," Buffett has done that. His company, Berkshire Hathaway, was a smallish textile manufacturing company when Buffett took it over. He gave up on the textile manufacturing business before long, but used the corporation as a conduit to purchase other smallish (perhaps "longshot") companies after that -- e.g., the Nebraska Furniture Mart, See's Candies -- to build his bankroll. He didn't start out by owning huge chunks of Gillette, Geico, Coca-Cola, and the Washington Post.

[ QUOTE ]
And as for the credit he got for not buying internet stocks during the bubble, why didn't he short them?

[/ QUOTE ]
The reason he avoided Internet stocks was not because he thought they were necessarily overvalued -- so he really shouldn't get any credit for avoiding them. People who give him credit for that are being results-oriented.

He avoided Internet stocks (or, more generally, technology stocks) because he didn't believe that he understood the market for technology-related products well enough.

He knows with sufficient certainty what the market for Coca-Cola will look like ten years from now; but he isn't competent to predict what the market for routers or memory chips or digital storage devices will look like ten years from now. Buffett sticks to investing in what he knows. He leaves the tech stuff to his friend Bill Gates.

It's not that Buffett is too stupid to understand the tech stuff. But any individual person's competence will necessarily have boundaries; Buffett recognizes his and plays within them. That's why he didn't go long on the tech stocks, and it's also why he didn't short them.

[knifeandfork]

wow leo you sure are hard on us lowly pokerplayers. if i may ask why did you have the pleasure to have several conversations with warren b? do you think the fact that you speak with him personally sways your opinions due to the enormity of the opportunity (not necesarily the content of the conversation). i dunno nuttin bout investin just htink your passion for this post is a little over the top. and i wish id listend when that guy told me stock x was going to split in two months, i think its goo dwhen that happens right?
villag id ,
jason

[David Sklansky]

"If you really think it's true that "options, short term trades," etc. can have an expected return greater than 25% (as distinct from short-term results greater than 25%), why hasn't anyone (to my knowledge -- corrections welcome) averaged better than 25% over the past 30 years using those instruments? "

Again, I'm almost sure that Vic Resnick and Jeff Yass have done way better than that for many years. Eventually though you run into the problem of betting so much you move the line. That can only be avoided when you go long, big stocks, long term.

[EvolvingFish]

Long-time lurker, first time poster.

Even as a person who often mocks the "Ivy's", this one made me laugh so hard I almost peed myself.

Penn may not be great, but if Teaneck is your standard and you're the poker guru - I'm no longer intimidated [img]/images/graemlins/cool.gif[/img].

Having the top 20 @ Teaneck deserve to get in to Penn - maybe and I mean maybe.

Not meeting any of their equal during your time there - social problem - nothing less, nothing more.

[TransientR]

Fond of dogmatic assertions, Leonardo?

Many talented people who add greatly to human existence don't care about beating the market, or playing poker.

I don't care how smart you or David are, a lot of this discussion displays the emotional maturity of two 12 year old boys in a gym locker room comparing penis size, IMO.

Frank

[DesertCat]

[ QUOTE ]
But why should that mean he would be so great at options, short term trades, hedging, going short, picking out good longshot bets in small companies, or any of the other strategies that many people tell me can, if done right, beat the 25% a year or so that he makes. ... And as for the credit he got for not buying internet stocks during the bubble, why didn't he short them?

[/ QUOTE ]

As far as shorting goes, he treats it as fools gold. Shorting a stock can net you at most, double your investment, and that only if the companies stock goes to zero. If you bet wrong, your potential losses are infinite.

It's like going all-in to try to steal the blinds when you still have 100BB. It can work many times in a row, but when it doesn't it will wipe you out. Professionals who short stocks for a living are some of the smartest people you'll ever meet, they are the first to call out the Ennrons of the world, but I'd never emulate them. I just don't think the risks they take are often worth the rewards.

As far as internet stocks go, besides Buffett's aformentioned aversion to the unpredictability of technology stocks, it was primarily the poor risk-reward ratio. A stock that is trading at an absurd valuation, can very easily reach 2x absurd or 3x absurd, and break you before later proving (too late) that you were right.

Warren's mantra is that it's effectively impossible to accurately predict short term stock price movements, so he sticks to a much easier game. If you can accurately estimate a companies true intrinsic value then it becomes easy to buy low and sell high. If asked, he would probably say that many of the strategies people claim work, either don't or only work with excessive risk.

A thousand monkeys betting their portfolios on coinflips each year will cause 999 to go broke within ten years. The remaining monkey will be wealthy, and world famous due to his ten year record of 100% annualized returns. He will be giving lectures to our finest colleges and his monkey investing books will be best-sellers, but it won't mean his future EV is positive. You can easily replace the word "monkeys" with "day-traders" in this paragraph.

Buffett has applied value investing principles in many different markets, including options trading, arbitrage investing (which is short term by nature), bonds, convertibles, and recently, in silver and currencies. He also started by investing in tiny companies that in many cases weren't even listed on stock exchanges, but were unbelievable steals. Today, because of the huge portfolio he's managing, he is forced to look for multi-billion dollar investment opportunities. This appears to be hurting his returns, at least in the short term. But I think there's little doubt he'll continue to beat the market averages until he takes his last breath. He just probably won't be doubling the market's returns any more.

[Leonardo]

I agree to an extent. You are right, many , if not most, brilliant people are not playing poker or trying to beat the market.Thank god for them, because I wouldnt have a job if it weren't for them. I dont think that I am a great person for managing a fund, I essentially add zero to the GNP. The guys picking up cans do more for society than I. If I were interested in science or something where I could use my brain to better society, I would, but Im not interested. I think you missed the point though. All I am saying is that investing is a game that is in another league to playing poker. The best investors are much more intelligent, hard working and highly skilled than the best poker players. That is all. Its so much more competetive. I just get frustrated when someone like David Sklansky assumes that because he is good at math that he could beat the S&P. It seems that everyone that I meet that is good at math (or so they think anyway) thinks that beating the market is easy. It isnt. Millions of people are trying to do it. Most fail. Warren Buffett is so much more intelligent than any pro poker player who ever lived.

[David Sklansky]

"Its so much more competetive. I just get frustrated when someone like David Sklansky assumes that because he is good at math that he could beat the S&P"

Not because I am good at math but rather because I think well. Since a monkey can equal the S%P all it takes is some good insights to beat it. The fact is that most wall street experts are like sports touts and do worse than monkeys.

"Warren Buffett is so much more intelligent than any pro poker player who ever lived."

I doubt he would agree. Not if you define intelligence the way it normally is defined.

[David Sklansky]

"Long-time lurker, first time poster.

Even as a person who often mocks the "Ivy's", this one made me laugh so hard I almost peed myself.

Penn may not be great, but if Teaneck is your standard and you're the poker guru - I'm no longer intimidated .

Having the top 20 @ Teaneck deserve to get in to Penn - maybe and I mean maybe.

Not meeting any of their equal during your time there - social problem - nothing less, nothing more."

Can someone explain to me what he just said? Meanwhile the year I graduated there were 18 National Merit Finalists at Teaneck High. More than any other public high school in New Jersey.