Just over a year ago, the New York Times published a popular story based on one our blog articles. The article showed the near impossibility for anyone, over the long-run, to outperform the market with skill. This particular NYT article was notable (for a while it was the most read and shared from that Sunday's print, and translated into news globally), in part because of it focused on how the mathematical conclusions reconcile with Warren Buffett's extraordinary career. Some critics spent April 2014 arguing that probability and statistics had little role, in analyzing Warren Buffett or BRK, and that our distraction would serve as a compelling opportunity to get in. Now that a year has passed, and we again approach his annual conference (this time his 50th-year anniversary), we'll revisit those critics from a year ago to see how their investment claims have held up.
Jim Cramer, for example, jumped on television to proclaim with excitement about Buffett: "his luck's about to change." What does that even mean? It means nothing. If anything, Cramer's show is the antidote to reasonable investing concerns.
In the chart below, we look at 12 monthly continuous returns, starting from mid-April of 2014, and through mid-April 2015. "Month #1" for example, covers mid-April, through mid-May.
To make the viewing easier, the difference between the BRK and the S&P 500 is shown in purple color. We see that this "outperformance" difference is erratic, insignificant, and often negative. So Buffett didn't have the well-earned "luck" Cramer and other critics promised. These critics and Buffett devotees would have simply led you astray and are never held to account.
Now the reason for separating the 12 month performance in to 4 quarters, is so that we don't overly get drawn into any one particular period. Instead we can see main pattern collected over time, and one can understand the consistency of any investment performance, by also picking and choosing the periods that meets his or her needs. For example see this article about the perils in interpreting an overall period performance analysis, when so much of the variance could come primarily from the arbitrary selection of time brackets.
The results are even worse on an economic basis, as we'll see with a gauge on the recent alpha (α) level. This is a risk-adjusted measure that incorporates the investor demand for a (above risk-free) rate of return on a security commiserate with its apparent risk.
Here below, we notice that for a range of four risk-free (rf) return and standardized covariance assumptions, Buffett's generation of α has never been strongly positive, and in fact at times is negative (generally aligning to bouts of risk-unadjusted underperformance.) It's clear from the main results shown here that there was not enough of a valid risk-adjusted opportunity to have invested in BRK, as a result of the analysis in the NYT article.
We're often get asked, offline and in our blog comments section: "what could be done to actively outperform the markets?" But this is a wrong-headed question to ask. The question instead should come from an approach of thinking first about the best way to not take unnecessary risk. The best fund managers fit into this pattern. However that's still not a probabilistically sufficient course; virtually all active managers -regardless- currently fail to outperform by a wide margin, given such a competitive and efficient market.
Buy and hold the broad market basket. Even as we now see compelling action from the White House, the best advice here does not require payment to either a broker nor similar robots. And the sage advice could not be more simple. And it's the same that Buffett has since given to his trustees in managing his will.
We should note that "The forever elusive α" blog article, the source for the NYT last year, remains among the most provocative articles ever published here. On an aside, another one of the most popular blog articles was our previous one, with 30k reads across all sources, and over 150 social media shares! It has been read by one of the world's most famous hedge fund managers, whose names is universally recognizable. A special acknowledgement to the great folks at the Financial Times, Bloomberg View (here, here), Zero Hedge, TraderFeed, AR, SigFig, Quantocracy, QuantsPortal, etc.
Lastly, this weekend we have the Most Popular article in the fashionable Pensions&Investments, a bi-weekly publication read by leading pension and endowment advisors. The article was also shared by CFA, who is currently having their annual global conference, and others such as Bloomberg's Ritholtz.
Jim Cramer, for example, jumped on television to proclaim with excitement about Buffett: "his luck's about to change." What does that even mean? It means nothing. If anything, Cramer's show is the antidote to reasonable investing concerns.
In the chart below, we look at 12 monthly continuous returns, starting from mid-April of 2014, and through mid-April 2015. "Month #1" for example, covers mid-April, through mid-May.
Now the reason for separating the 12 month performance in to 4 quarters, is so that we don't overly get drawn into any one particular period. Instead we can see main pattern collected over time, and one can understand the consistency of any investment performance, by also picking and choosing the periods that meets his or her needs. For example see this article about the perils in interpreting an overall period performance analysis, when so much of the variance could come primarily from the arbitrary selection of time brackets.
The results are even worse on an economic basis, as we'll see with a gauge on the recent alpha (α) level. This is a risk-adjusted measure that incorporates the investor demand for a (above risk-free) rate of return on a security commiserate with its apparent risk.
Here below, we notice that for a range of four risk-free (rf) return and standardized covariance assumptions, Buffett's generation of α has never been strongly positive, and in fact at times is negative (generally aligning to bouts of risk-unadjusted underperformance.) It's clear from the main results shown here that there was not enough of a valid risk-adjusted opportunity to have invested in BRK, as a result of the analysis in the NYT article.
We're often get asked, offline and in our blog comments section: "what could be done to actively outperform the markets?" But this is a wrong-headed question to ask. The question instead should come from an approach of thinking first about the best way to not take unnecessary risk. The best fund managers fit into this pattern. However that's still not a probabilistically sufficient course; virtually all active managers -regardless- currently fail to outperform by a wide margin, given such a competitive and efficient market.
Buy and hold the broad market basket. Even as we now see compelling action from the White House, the best advice here does not require payment to either a broker nor similar robots. And the sage advice could not be more simple. And it's the same that Buffett has since given to his trustees in managing his will.
We should note that "The forever elusive α" blog article, the source for the NYT last year, remains among the most provocative articles ever published here. On an aside, another one of the most popular blog articles was our previous one, with 30k reads across all sources, and over 150 social media shares! It has been read by one of the world's most famous hedge fund managers, whose names is universally recognizable. A special acknowledgement to the great folks at the Financial Times, Bloomberg View (here, here), Zero Hedge, TraderFeed, AR, SigFig, Quantocracy, QuantsPortal, etc.
Lastly, this weekend we have the Most Popular article in the fashionable Pensions&Investments, a bi-weekly publication read by leading pension and endowment advisors. The article was also shared by CFA, who is currently having their annual global conference, and others such as Bloomberg's Ritholtz.
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