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#11
05-13-2005, 08:15 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
[ QUOTE ]
Buffett's success is basic value investing principles, he buys undervalued securities. He's just been at it a bit longer, and is a bit better at it, than all the other value investors. [/ QUOTE ] Or undervalued investments are becoming harder to find as the markets become more efficient.... 
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#12
05-14-2005, 02:45 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
Market Wizards is talking about a handfull of people, most of which have smallish amount of money ($100,000). Malkeil is talking about large numbers of people and billions of $.
It is impossible for large numbers of people to beat the market. It is impossible for more than a few large billion dollar funds to beat the market. Both books agree. The market can be beat by a very small number of people with comparitively small amounts to invest.
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#13
05-14-2005, 03:21 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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Malkeil is talking about large numbers of people and billions of $. [/ QUOTE ] I highlighted his language to emphasize that this is not the case. He says, literally, "no one." He does not say "most" or "on average" or "people with little capital." He says "no one." [ QUOTE ] Both books agree. The market can be beat by a very small number of people with comparitively small amounts to invest. [/ QUOTE ] Small is not the same as no one. The books don't agree. eastbay
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#14
05-14-2005, 06:38 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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Or undervalued investments are becoming harder to find as the markets become more efficient.... [/ QUOTE ] I wonder about this myself. The counter proof is that Buffett is still outperforming the S&P 500 even with his $120B anchor. He does find legit undervalued investments. I used to think that improving technology might narrow the underpricings but I changed my mind. It doesn't matter how quickly you can find low PE or low P/B stocks, if you don't follow the value investing philosophy. For the market to truly become more efficient, a higher percentage of the money being managed has to be managed intelligently, and I'm not sure I see any evidence of that. The internet boom is a great counter example as well. There were "momentum investors" (i.e. gamblers) who attracted tons of money when the market went up. And they will again the next time we have a great bull market. It doesn't seem anyone learns any lessons. CNBC isn't helping anyone become better investors, on the contrary it's akin to a "pump and dump" PR service. But for Buffett to really shine in the future he needs a market crash, like the seventies. He's stuck sitting on his hands right now. I on the other hand, am a micro investor and I invest in areas where few professionals care to look, so I have no trouble beating the indexes. But I wish I had Buffett's problem.
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#15
05-14-2005, 06:53 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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The internet boom is a great counter example as well. There were "momentum investors" (i.e. gamblers) who attracted tons of money when the market went up. And they will again the next time we have a great bull market. It doesn't seem anyone learns any lessons. [/ QUOTE ] As Malkiel mentions somewhere in his book, the problem with this kind of thinking is that although the inefficiencies are obvious looking back at the bubble, there was no real way to identify places to short at the time to take advantage of the overvaluations.
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#16
05-14-2005, 08:19 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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As Malkiel mentions somewhere in his book, the problem with this kind of thinking is that although the inefficiencies are obvious looking back at the bubble, there was no real way to identify places to short at the time to take advantage of the overvaluations. [/ QUOTE ] Well there's two sides to that, first is that the inefficiencies were there, proving how inefficient the modern market can still get. And shorting isn't the province of most value investors. The risk/reward isn't attractive and the Ben Graham school accepts that no matter how out of whack the market gets, no-one has any idea when it will correct. So staying on the sidelines is the best option for the intelligent invester. This is partly why a market bubble can persist for so long and get so extreme. But there were a couple ways to profit from the internet boom. First occured during the boom, supposedly low growth "old economy" companies suffered from lack of interest and were cheap. I wasn't actively investing then so I can't attest to the truth of this. But, after the bubble I can attest to the great valuations in the internet market. Internet companies sometimes sold for less than cash, even after announcing the decision to shut down and return all of that cash. That's the standard Ben Graham play, stay in cash during the crazy times, and dive in during the over-correction. Once again, both episodes show how inefficient the market can get, and why people like Buffett say the market is frequently efficient, but not always.
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#17
05-15-2005, 12:49 AM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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Warren Buffett made an interesting comment about trader performance records with his famous "coin flipping contest" argument. ie. Even with millions of participants in a huge tournament someone will still win the tournament. Does that make the winner an expert coin flipper? [/ QUOTE ] You need to reread the essay. He makes the exact opposite point. Link [ QUOTE ] That said, having read both books, and being a portfolio manager by trade, I think that there is a grey area in between the two books. I think it is possible to beat the market (and have consistently done so myself) but like anything else worthwhile, it is fairly difficult to do, is a lot of work, and takes a certain disposition. [/ QUOTE ] I agree. [ QUOTE ] For most people I think trading is -EV. This is confirmed by the numerous studies on retail trading accounts, mutual fund performance, day-trader failure rates, and even independent floor traders who constitute a hugely motivated and full-time group. [/ QUOTE ] Very true once again. I agree with the other posters comparison to poker though. However, just because I think the market can be beat doesn't mean I am willing to bank my retirement on a belief that I can beat it. Although trusting someone who has a proven track record (Bill Miller, etc.) with my retrement doesn't seem like a bad idea. [ QUOTE ] In other words, who wants to spend hours a day working on trading when you only have a ~10% chance of beating the market. Of those ~10%, how many beat the market by say double-digits per annum? If not, does the extra 5% a year compensate for the time, training, and stress of just holding the SPY's which if you hold them long enough are an almost sure thing? [/ QUOTE ] Yes 5% would be worth it. Lets take an example of 10,000 invested over 30 years. At 10% - $174494.02 At 15% - $662117.72 that's an oversimplification, but the point is 5% is a big enough edge to make a huge difference. At 1 or 2 percent the opportunity cost of making other income may be greater than the extra returns depending on your professional skills.
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#18
05-16-2005, 12:18 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
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And yet, on page 245 of "A Random Walk Down Wall Street", Malkiel makes the somewhat astonishing assertion that: No one person or institution has yet to produce a long-term, consistent record of finding money-making, risk-adjusted individual stock-trading opportunities. Which do you think is closer to the truth? eastbay [/ QUOTE ] Malkiel is exactly correct about "efficient markets". Example of "efficient markets": Large Cap Stocks Liquid Commodities All Index/Commodity Futures Most Option Markets Mutual Funds Anything an Unsophisticated Person Would Think of Trading ** No one ** beats these markets long-term... Without inside information... Combined with "closeness" to the market... And rock bottom transaction costs. But people lie about their results all the time. (This must be a big shock for poker players). The hedge fund world is unregulated. Books like "Market Wizards" are mostly hype. I'm a professional trader and US broker-dealer.. And have both MW books... And they were a waste of time and money. But... There are many "inefficient markets"... Such as exotic warrants/convertibles/bonds... Where a sophisticated "risk arbitrage" can be very profitable. Please note the words... "exotic", "sophisticated", "risk", and "very profitable". Only very special people can do this... Perhaps max 10% of hedge fund managers... And precisely ZERO stock brokers... Just like only a very specially talented person can be a top pro poker player. rm+ [img]/images/graemlins/cool.gif[/img] [img]/images/graemlins/cool.gif[/img] [img]/images/graemlins/cool.gif[/img]
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#19
05-16-2005, 12:33 PM
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Re: Reconciling \"Random Walk\" with \"Market Wizards\"
[ QUOTE ]
[ QUOTE ] [ QUOTE ] Warren Buffett made an interesting comment about trader performance records with his famous "coin flipping contest" argument. ie. Even with millions of participants in a huge tournament someone will still win the tournament. Does that make the winner an expert coin flipper? [/ QUOTE ] Obviously not, but I think the analogy is poor. [ [/ QUOTE ] I don't think the analogy is that far-off. My experience is that a good portion of the people profiled in the Market Wizards books are the "coin flippers" who got lucky. There are some notable exceptions, including the guy I work for. [/ QUOTE ] Buffett and Paluka are correct. The "coin flipping" analogy is dead on. The overwhelming majority of mutual funds managers... That tout "outperforming" the S&P 500... In other words... Doing better than MINUS 21% (plus 2% annual dividends)... Over the last 5 and a half years... Are just the lucky "coin flippers". rm+ [img]/images/graemlins/cool.gif[/img] [img]/images/graemlins/cool.gif[/img] [img]/images/graemlins/cool.gif[/img]
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