What a great distraction from the CFAI curriculum on a Saturday to read Berkshire Hathaway’s Annual Letter to Shareholders. Walks you through the pitfalls of the Black Scholes
Going through this right now. I like how the headlines this morning only fixated on Berkshire’s worst return in history… not the fact that they still beat the piss out of the S&P. Given the circumstances I think they help up very well.
I was thinking the same thing. Warren Buffet’s style doesn’t seek to eliminate systematic risk, and that’s what he got pounded with. But he did manage to beat the heck out of the S&P, which shows that his value strategy does provide value.
did he beat the s&p cuz he was sitting on a wad of cash?
he cold disses private equity. numi, reply?
“(If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians)” I fucking love this man
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas. ON FIRE!!!
Slapped around black scholes too.
TheAliMan Wrote: ------------------------------------------------------- > he cold disses private equity. numi, reply? I’m sure it was all numi’s fault, haha.
I think they should also show market value of BRK vs. S&P 500 performance for the year. It doesn’t make sense to me why they would use their book value to compare with the market value of the index. http://finance.yahoo.com/echarts?s=BRK-A#chart7:symbol=brk-a;range=20071231,20081231;compare=^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined I don’t know if I’d call that “beating the piss” out of the S&P.
VOBA Wrote: ------------------------------------------------------- > I think they should also show market value of BRK > vs. S&P 500 performance for the year. It doesn’t > make sense to me why they would use their book > value to compare with the market value of the > index. > > http://finance.yahoo.com/echarts?s=BRK-A#chart7:sy > mbol=brk-a;range=20071231,20081231;compare=^gspc;i > ndicator=volume;charttype=line;crosshair=on;ohlcva > lues=0;logscale=off;source=undefined > > I don’t know if I’d call that “beating the piss” > out of the S&P. It makes a ton of sense to me.
TheAliMan Wrote: ------------------------------------------------------- > Investors should be skeptical of history-based > models. Constructed by a nerdy-sounding > priesthood > using esoteric terms such as beta, gamma, sigma > and the like, these models tend to look > impressive. Too often, > though, investors forget to examine the > assumptions behind the symbols. Our advice: Beware > of geeks bearing > formulas. I somewhat agree. But I wouldn’t say toss out “history-based models,” as if the quantitative analysis of history is the only way to do history-based models. A knowledge of financial history and economic history is pretty essential right now. If you’re not going to use history to inform your decisions, what are you going to use? General analysis can help, but you can’t really tell if you’re in the same universe as your analytical assumptions: history can give you a sanity check, even if it’s not perfect.
Can someone post a link?
KJH Wrote: ------------------------------------------------------- > did he beat the s&p cuz he was sitting on a wad of > cash? How big a wad did he have? I can believe this, since maybe he didn’t see any value out there worth buying and accumulated cash, but I don’t know the details.
VOBA Wrote: ------------------------------------------------------- > I think they should also show market value of BRK > vs. S&P 500 performance for the year. It doesn’t > make sense to me why they would use their book > value to compare with the market value of the > index. > > http://finance.yahoo.com/echarts?s=BRK-A#chart7:sy > mbol=brk-a;range=20071231,20081231;compare=^gspc;i > ndicator=volume;charttype=line;crosshair=on;ohlcva > lues=0;logscale=off;source=undefined > > I don’t know if I’d call that “beating the piss” > out of the S&P. Agree, I bet the book value of the S&P 500 outperformed the S&P 500 price index.
bchadwick, you have a point. I fully agree with you that a deep understanding of history is important, and Buffett, throughout all of his letters, gives examples of various economic occurrences in the past. What I think he specifically alluding to is the idea of portfolio theory and other complicated ideas. These theories do have merit and help some people to profit. However, I just think it’s dangerous when investors don’t have an understanding of business operations and investor psychology and instead, heavily rely on _quantitative_ historical models to make up for it. I think this statement agrees with what you’ve said.
Yeah, I’m with you, Ali. When I first got into this field, I was concerned that people were just too in love with their models to see what the risks were. The math looks elegant and unassailable, particularly if you’re not a math God yourself. But I knew from other parts of economic history that this almost always ends badly. Just how badly this has worked out is amazing even to me, though, even if I’m not completely surprised, it’s still a shock. The problem was that when the quant models were working, they were working so well that it was hard to put up a credible argument against them. As a result, we overbinged on risky assets and are now on the operating table like an obese giant with a 25 year history of nothing but chocolate eclairs. yummmm
Berkshire had $47 billion going into the crisis and $25 billion at the end of the year.
To paraphrase Buffett - I forget the exact quote but bear with me. He was discussing managerial competence, etc. He basically said that you want to own fractional shares of businesses that are basically bullet and idiot proof. You want to own a company that can be run by a ham sandwich, because someday it will be run by one. Applying this to the current environment, you could have put a ham sandwich in charge of running a portfolio of basically any hedge fund and the results would have been the same. Take for example fixed income arbitrage as a strategy. Lever and lock in the yield differential can turn a 3% return into a 15% return.
EMHdenied Wrote: ------------------------------------------------------- > VOBA Wrote: > -------------------------------------------------- > ----- > > I think they should also show market value of > BRK > > vs. S&P 500 performance for the year. It > doesn’t > > make sense to me why they would use their book > > value to compare with the market value of the > > index. > > > > > http://finance.yahoo.com/echarts?s=BRK-A#chart7:sy > > > > mbol=brk-a;range=20071231,20081231;compare=^gspc;i > > > > ndicator=volume;charttype=line;crosshair=on;ohlcva > > > lues=0;logscale=off;source=undefined > > > > I don’t know if I’d call that “beating the > piss” > > out of the S&P. > > It makes a ton of sense to me. Buffett doesn’t bow to Mr. Market. Mr. Markets bows to Buffett. Read the owners manual. He measures the rate at which he can grow the per share value of his business (approximated by BV).