WARREN "THE WHIP" AND THE BELL CURVE
I couldn't resist the title. I refer, of course, to the legendary Warren Buffett, iconish American Billionaire investor. Several years ago I read Andrew Kilpatrick's excellent and very enjoyable biography of Buffett entitled "Of Permanent Value" (highly recommended). In the mid/late 1990s, I owned a couple of Class A Berkshire Hathaway shares as well, so I've always been a follower of Buffett and keen listener whenever he talks. (not to mention reading whatever I can from or about Buffett) In the book, Kilpatrick makes reference to Buffett as "Warren the Whip," since Buffett had been asked on some occasions to throw out the first pitch for the Omaha area minor league baseball team. (Buffett is very fond of sports and supportive of his local teams.)
I refer also to a great book from the early 1990s entitled "The Bell Curve," authored by Hernnstein and Murray (Harvard psychologists). In particular, this volume dealt with some "inconvenient truths" about the distribution of IQ scores among the American student population. It caused quite a stir back then, and legions of apologists came out of the woodwork to smear the authors and slander their intentions (and the resulting data) for their research. Actually, the book just outlined the statistical phenomenon of the bell curve in one particular (uncomfortable) area. It shows up in virtually all mass distributions of statistical data.
Every year Warren Buffett and his Berkshire investing sidekick Charlie Munger hold the Berkshire Hathaway shareholders meeting in Omaha, and it has become known as a "Woodstock for Capitalists" in recent years. And for good reason: this year, the event hosted upwards of 30,000 Berkshire faithful who fly in from all around the country (and globe) to enjoy the event and glean nuggets of economic and investing wisdom from Buffett and Munger. Unfortunately, I personally have never had the opportunity to attend, but it is widely followed now on the Internet and also on CNBC, as well as other financial media.
The Berkshire meeting was just held last week (as I write this - May), and it got me to thinking about several things blogworthy. Moreover, I enjoyed a lively conversation with my brother recently about the state of our economy, the markets, investing, and so on. A "stimulus plan" for a good blog post...
As I have covered in other posts (see "Where Have All the Good Times Gone?"), the bell curve is a statistical phenomenon that shows up virtually always in the distribution of large amounts of data, whether we have a sample of weight, height, intelligence, whatever. It is - mysteriously - part of the warp and woof of human experience. There is a big bulge in the middle (the bell), with the most sample participants represented, with a minority of sample participants - "fat tails" - on either end, featuring those, say, either very short (the left tail) or very tall (the right tail). The same happens with the performance of investors or managers of hedge funds, mutual funds, etc. - their performance, over long periods of times (a couple/three decades) follows the path of the "bell" in a graphed distribution. It is an event that goes along with the determinist view of existence (the old argument of free will vs. determinism). You can't escape it ultimately, and if you do for a short period of time, it's only a matter before your performance "reverts to the mean." Nobody stays at the fat right tail forever - it is impossible.
Why impossible? Because if it was, somebody - sooner or later - would corner all the world's wealth, and that has not - nor can it ever or will it ever - happen. Whether God's or Adam Smith's invisible hand waives on the new contestants into their place in the sun (or the dog house) at any given time is up for debate, but the phenomenon is quite predictable and reliably demonstrated - again - over long periods of time. Short periods of outperformance give us the illusion that somebody has a hot hand with some proprietary system (usually complicated, of course, to bamboozle investors into putting their money with the hot manager of the moment) and he/she will make a quick fortune. Never works out that way - except for a lucky few at the right end of the fat tail on the bell curve.
Yep - it's guaranteed that some will indeed profit mightily by some "system" or another (whether value, growth, commodities, or momentum - whatever "flavor" of the moment) - these are at the right tail. Concomitantly, those at the left end of the curve will appear like unfortunate boobs and will be losing their rears, since it is determined beforehand that they will lose big (somebody has to!). The schlubs who populate the vast majority in the middle of the bell curve might just stay even with the averages - if they're lucky. They certainly will not outperform the market averages over 2-3 decades time.
Moreover, the distribution of performance of even the best and smartest managers - such as Buffett - will "travel" around the bell curve whether they like it or not. Doesn't matter how "smart" or well-trained the manager is (and Buffett is among the smartest and wisest with winnings to prove it). Buffett is traveling currently from the far right of the bell curve (significant outperformance of the averages from the late '60s/early '70s on up through the '90s) towards the middle. His performance has recently reverted to the mean. Let me explain.
Buffett has earned the reputation as America's (and one of the world's) best and most astute investors; deservedly so. A disciple of the great Benjamin Graham (professor of finance at Columbia) and apostle of the Graham and Dodd value investing methodology, he has been able to amass a fortune for himself and his early investors with his investment vehicle Berkshire Hathaway (BRKA). And, along the bell curve distribution, his performance figures for those roughly 30 years were at the far right of the bell curve. An incredible performance streak, to be sure.
Unfortunately, the past 10 years had something else in mind for Warren. His performance has been mediocre at best (granted in a generally lousy market), and Berkshire shares trade for no more than they did 10 years ago. One might be tempted to say that at least he has kept up with the S & P 500, which has also gone nowhere over the last decade (actually, it has declined a bit) and has not cost his shareholders much of their cash, as have other worthless mutual funds and hedge funds, etc. It's been a tough, tough ten years, for sure.
However, that's only considering the nominal figures, as we have to factor in inflation as well. And on this score, not only has America and her citizens and investors lost major ground over the past decade in buying power (while salaries have gone nowhere, for the most part), but so has Buffett's Berkshire. So, that $90,000 share price for ONE Berkshire Hathaway share today actually has the buying power of only $67,000 in 1999 dollars, assuming an average of 3% inflation per year; a reasonable assumption and the figure used in Graham and Dodd's book "The Intelligent Investor" to estimate likely inflation in the era subsequent to the publishing of that book (1970s - and, I might add - with an excellent Forward written by Warren Buffett himself). Long story short - we have ALL lost money in this last awful decade - both nominally to a lousy market - and in real, painful terms due to inflation and dollar degradation.
Yes, even the great Warren Buffett is subject to the force of the Bell Curve. (Resistance is futile...) I might even say that the first 30 years of Berkshire (not to take anything away from his smarts and financial savvy) were boosted along by the good, old-fashioned force of luck. Yes - "LUCK." (His investment style was "in the right place at the right time".)
Granted Buffett has a knack for picking undervalued assets and holding them until the market recognizes their value (his favorite holding period is"forever," as he wisely says). At any given time, SOME form of market divination or investment "style" will be in - it is guaranteed by the bell curve phenomenon. Somebody will indeed be basking in the successful limelight of the right tail of the bell curve (but not forever!). These individuals will look very "smart" and successful at the time. (I hope they enjoy it. It won't last.) But, just as has happened to Warren "the Whip" over the last 10 years, their relative outperformance will not (and cannot) last, and they will travel along the timeless, well worn curves of the bell curve, on their way with many fellow travelers toward the great, fat, mediocre middle.
TTC
I refer also to a great book from the early 1990s entitled "The Bell Curve," authored by Hernnstein and Murray (Harvard psychologists). In particular, this volume dealt with some "inconvenient truths" about the distribution of IQ scores among the American student population. It caused quite a stir back then, and legions of apologists came out of the woodwork to smear the authors and slander their intentions (and the resulting data) for their research. Actually, the book just outlined the statistical phenomenon of the bell curve in one particular (uncomfortable) area. It shows up in virtually all mass distributions of statistical data.
Every year Warren Buffett and his Berkshire investing sidekick Charlie Munger hold the Berkshire Hathaway shareholders meeting in Omaha, and it has become known as a "Woodstock for Capitalists" in recent years. And for good reason: this year, the event hosted upwards of 30,000 Berkshire faithful who fly in from all around the country (and globe) to enjoy the event and glean nuggets of economic and investing wisdom from Buffett and Munger. Unfortunately, I personally have never had the opportunity to attend, but it is widely followed now on the Internet and also on CNBC, as well as other financial media.
The Berkshire meeting was just held last week (as I write this - May), and it got me to thinking about several things blogworthy. Moreover, I enjoyed a lively conversation with my brother recently about the state of our economy, the markets, investing, and so on. A "stimulus plan" for a good blog post...
As I have covered in other posts (see "Where Have All the Good Times Gone?"), the bell curve is a statistical phenomenon that shows up virtually always in the distribution of large amounts of data, whether we have a sample of weight, height, intelligence, whatever. It is - mysteriously - part of the warp and woof of human experience. There is a big bulge in the middle (the bell), with the most sample participants represented, with a minority of sample participants - "fat tails" - on either end, featuring those, say, either very short (the left tail) or very tall (the right tail). The same happens with the performance of investors or managers of hedge funds, mutual funds, etc. - their performance, over long periods of times (a couple/three decades) follows the path of the "bell" in a graphed distribution. It is an event that goes along with the determinist view of existence (the old argument of free will vs. determinism). You can't escape it ultimately, and if you do for a short period of time, it's only a matter before your performance "reverts to the mean." Nobody stays at the fat right tail forever - it is impossible.
Why impossible? Because if it was, somebody - sooner or later - would corner all the world's wealth, and that has not - nor can it ever or will it ever - happen. Whether God's or Adam Smith's invisible hand waives on the new contestants into their place in the sun (or the dog house) at any given time is up for debate, but the phenomenon is quite predictable and reliably demonstrated - again - over long periods of time. Short periods of outperformance give us the illusion that somebody has a hot hand with some proprietary system (usually complicated, of course, to bamboozle investors into putting their money with the hot manager of the moment) and he/she will make a quick fortune. Never works out that way - except for a lucky few at the right end of the fat tail on the bell curve.
Yep - it's guaranteed that some will indeed profit mightily by some "system" or another (whether value, growth, commodities, or momentum - whatever "flavor" of the moment) - these are at the right tail. Concomitantly, those at the left end of the curve will appear like unfortunate boobs and will be losing their rears, since it is determined beforehand that they will lose big (somebody has to!). The schlubs who populate the vast majority in the middle of the bell curve might just stay even with the averages - if they're lucky. They certainly will not outperform the market averages over 2-3 decades time.
Moreover, the distribution of performance of even the best and smartest managers - such as Buffett - will "travel" around the bell curve whether they like it or not. Doesn't matter how "smart" or well-trained the manager is (and Buffett is among the smartest and wisest with winnings to prove it). Buffett is traveling currently from the far right of the bell curve (significant outperformance of the averages from the late '60s/early '70s on up through the '90s) towards the middle. His performance has recently reverted to the mean. Let me explain.
Buffett has earned the reputation as America's (and one of the world's) best and most astute investors; deservedly so. A disciple of the great Benjamin Graham (professor of finance at Columbia) and apostle of the Graham and Dodd value investing methodology, he has been able to amass a fortune for himself and his early investors with his investment vehicle Berkshire Hathaway (BRKA). And, along the bell curve distribution, his performance figures for those roughly 30 years were at the far right of the bell curve. An incredible performance streak, to be sure.
Unfortunately, the past 10 years had something else in mind for Warren. His performance has been mediocre at best (granted in a generally lousy market), and Berkshire shares trade for no more than they did 10 years ago. One might be tempted to say that at least he has kept up with the S & P 500, which has also gone nowhere over the last decade (actually, it has declined a bit) and has not cost his shareholders much of their cash, as have other worthless mutual funds and hedge funds, etc. It's been a tough, tough ten years, for sure.
However, that's only considering the nominal figures, as we have to factor in inflation as well. And on this score, not only has America and her citizens and investors lost major ground over the past decade in buying power (while salaries have gone nowhere, for the most part), but so has Buffett's Berkshire. So, that $90,000 share price for ONE Berkshire Hathaway share today actually has the buying power of only $67,000 in 1999 dollars, assuming an average of 3% inflation per year; a reasonable assumption and the figure used in Graham and Dodd's book "The Intelligent Investor" to estimate likely inflation in the era subsequent to the publishing of that book (1970s - and, I might add - with an excellent Forward written by Warren Buffett himself). Long story short - we have ALL lost money in this last awful decade - both nominally to a lousy market - and in real, painful terms due to inflation and dollar degradation.
Yes, even the great Warren Buffett is subject to the force of the Bell Curve. (Resistance is futile...) I might even say that the first 30 years of Berkshire (not to take anything away from his smarts and financial savvy) were boosted along by the good, old-fashioned force of luck. Yes - "LUCK." (His investment style was "in the right place at the right time".)
Granted Buffett has a knack for picking undervalued assets and holding them until the market recognizes their value (his favorite holding period is"forever," as he wisely says). At any given time, SOME form of market divination or investment "style" will be in - it is guaranteed by the bell curve phenomenon. Somebody will indeed be basking in the successful limelight of the right tail of the bell curve (but not forever!). These individuals will look very "smart" and successful at the time. (I hope they enjoy it. It won't last.) But, just as has happened to Warren "the Whip" over the last 10 years, their relative outperformance will not (and cannot) last, and they will travel along the timeless, well worn curves of the bell curve, on their way with many fellow travelers toward the great, fat, mediocre middle.
TTC
posted by thoughtful conservative at 11:22 PM
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