Wow, that's an average 26% per year increase (for the non-inflation-adjusted data) over a 70 year timespan. That's definitely not a random walk down wall street [1]. For reference, Dow Jones seems to have about 7% per year for the same time period.
"We find that [Buffett's] alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management."
Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI
and I've been pondering this efficiency hypothesis.
Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision.
What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea).
I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.
If UPRO (s&p 500 leveraged 3x) had existed since the early 50s, it would've averaged about 20%-25% gains per year up until now. Warren Buffett also used leverage to invest.
Also note his net worth increased even during recession times ,of which there were twelve during his lifetime so far, except for the 1974-1975 recession.
To me the biggest anomaly here is the four year period from 1956 to 1960, 26 to 30, when Buffet octupled his net worth from $1M to $8M. Plenty of silicon valley engineers will have a net worth of $1M, but I think few make it to $8M. What was Buffet doing during those magical 4 years?
Leverage is one big thing. Buffet is a money manager, so he takes outside money, and make money off of that. Most of Silicon Valley engineers won't do that. 1956 is when he started taking serious outside money.
On the chart, the preceding few years have a very similar slope. One possible explanation is that he entered his 20s after all, and you might imagine that he started being taken more seriously in his business ventures when compared to the preceding period (i.e. it is possible the growth looks really huge when starting from a small base)
I remember going through some of my refrence books. I was deciding which one's to toss. I opened Encyclopedia of Psychiatry (vol. 1 and 2).
The first page I flipped to said, "A man of 50 will not make anymore money than he is currently making in his life." It was just so specific, or I I got the quote wrong? I recall looking at it a few times. It was personally depressing because I was broke, and hitting 50.
To this day, I think about that sentance, supposedly extrapolated from years of statistics.
Well, even though most of the wealthy people I have pesonally interacted with had the likability factor of a boat anchor; Warren Buffet seems like one of the wealthy the others should try to emulate. He is one of the guys I secretly root for.
If you click through to the original article[1] linked by the blog post, they explain that
> Warren Buffett became a player in the investment game at the wee age of 11, eventually using cash he earned from his paper route to buy some farmland in his home state. As a high school sophomore, he also reaped the rewards of a booming pinball machine business.
Buffet's approach of combining high leverage with low growth 'value' equities is a large part of his great performance. This is not to say there isn't a skill in noticing the benefits of this approach and convincing creditors and investors to let you take on all the debt, but a surprisingly small proportion of these gains are due to stock picking.
Buffett actually has very little debt. Most of the leverage comes from insurance float - when you buy insurance with GEICO Buffett invests the money until you crash.
> Comparing yourself to others and especially to the best performer ever in your skill/expertise is unhealthy. Don’t compare yourself to others.
And yet here I am anyway, nearing almost 30, still in graduate school, wondering if I'll ever know what it's like to have a reasonable amount in savings, let alone a "net worth" :)
I've only started caring about money a couple of years ago, so no point comparing 14-year old me with anyone in terms of money.
What gets me is how much more creative successful people were when they were young. Fishing and re-selling golf balls? Pinball business?? When I was 14 I was too busy with computer games.
My favorite part of his history in business is how the company whose name he eventually adopted for his whole operation (Berkshire Hathaway) was actually one of his self-admitted stupidest acquisitions, one based on vengeance rather than strategy. Seems like an unspoken bit of advice from him: name your company after your biggest fuck up, so you'll never forget you're only human.
The most interesting thing is that y-axis is exponential. iIts humbling that Buffet didn't even crossed 100M mark when he was 40! While wealth accumulation seems to be exponential, it's sure a long winding road.
These days doesn't he transfer quite a bit (5%ish ?) into Gates' trust every year? Does that still count as 'his' for the purposes of this graph or is it deducted?
slazaro|9 years ago
markild|9 years ago
A nice way to think of it is that a linear line on a logarithmic axis would look exponential on a linear axis.
svantana|9 years ago
[1] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
JumpCrisscross|9 years ago
http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...
yodsanklai|9 years ago
Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision.
What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea).
I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.
unknown|9 years ago
[deleted]
xyzzy4|9 years ago
Nanite|9 years ago
scrrr|9 years ago
modeless|9 years ago
bisRepetita|9 years ago
Then there is early luck and talent.
http://www.valuewalk.com/2015/05/warren-buffett-partnership/
thr0waway1239|9 years ago
icantdrive55|9 years ago
The first page I flipped to said, "A man of 50 will not make anymore money than he is currently making in his life." It was just so specific, or I I got the quote wrong? I recall looking at it a few times. It was personally depressing because I was broke, and hitting 50.
To this day, I think about that sentance, supposedly extrapolated from years of statistics.
Well, even though most of the wealthy people I have pesonally interacted with had the likability factor of a boat anchor; Warren Buffet seems like one of the wealthy the others should try to emulate. He is one of the guys I secretly root for.
tim333|9 years ago
efaref|9 years ago
At 34, his net worth was $7M, so relatively speaking, I only need £70k to be doing about as well as he was.
I think I'm actually doing better. :-)
elsurudo|9 years ago
freyr|9 years ago
sdrothrock|9 years ago
If you click through to the original article[1] linked by the blog post, they explain that
> Warren Buffett became a player in the investment game at the wee age of 11, eventually using cash he earned from his paper route to buy some farmland in his home state. As a high school sophomore, he also reaped the rewards of a booming pinball machine business.
1. http://www.marketwatch.com/story/from-6000-to-67-billion-war...
dejv|9 years ago
oli5679|9 years ago
http://xqdoc.imedao.com/150c22613c69373fe2602a80.pdf
tim333|9 years ago
kale|9 years ago
unknown|9 years ago
[deleted]
chestervonwinch|9 years ago
And yet here I am anyway, nearing almost 30, still in graduate school, wondering if I'll ever know what it's like to have a reasonable amount in savings, let alone a "net worth" :)
oneloop|9 years ago
What gets me is how much more creative successful people were when they were young. Fishing and re-selling golf balls? Pinball business?? When I was 14 I was too busy with computer games.
nxzero|9 years ago
victorology|9 years ago
jballanc|9 years ago
sytelus|9 years ago
sunstone|9 years ago
mountaineer22|9 years ago
chhib|9 years ago
nxzero|9 years ago
http://www.businessinsider.com/how-a-young-warren-buffett-ma...
known|9 years ago
sokoloff|9 years ago