The Hunger for Content and the Effect
Financial media outlets of all types hunger for content. They are driven to find an audience, since their business models depend upon it. Any financial program needs guests. Prominent journalists need to write stories that will attract readers. Bloggers who depend upon advertising or promotion need to find and satisfy an audience. What effect does this have?
Quantity versus Quality
The rise of the blogosphere has generated diversity in content. Anyone with a point of view can start a blog and offer opinions. A few months ago we noted that some outside surveys questioned the credibility of financial blogs. The definition of a financial blog was open to question, since it included mainstream media efforts to reach out to a new audience.
Competition and expansion of financial television has had the same effect. Every program needs guest spots and the focus is on the issue of the day.
No one seems to ask whether the guest, or columnist, or blogger really has the right qualifications to be offering advice on the topic at hand. The omnipresent question is the prospect for a recession. Financial television asks the recession question daily to anyone and everyone. Most people getting a TV opportunity, are not bashful about answering the question.
The Consumer
For all but a few, we are consumers of economic forecasts. We have no independent ability to make projections, so our role is instead one of deciding who knows, and who does not. At "A Dash" we believe that the democratization of the media — emphasizing the Internet — has made the task of the consumer more difficult. Appearing on television or having a big-time blog confers a sense of legitimacy that may be completely unfounded.
Most people do not realize this. In particular, individual investors do not make this distinction.
It is an expensive mistake.
Are Bloggers too Negative?
There is a New York-centric debate going on among several prominent commentators (all professed pals), highlighted in the New York Times, about whether bloggers are too negative. None of the participants dares to question the qualifications of any of the others, so the debate is rather lame. Paul Kedrosky (at one of our featured sites) raised the question. He did so assuming facts not in evidence about the existence of a recession, and on the eve of a significant rebound in stocks (which we predicted the following evening). Barry Ritholtz (at another site we recommend to our readers) offers a response. Herb Greenberg also weighs in.
We are especially intrigued by the following comment in the Greenberg article:
I don’t make market calls or offer investment advice. But via the media
world, I’ve also morphed, for better or for worse (depending on your
perspective), into somewhat of a financial commentator. I figure my
opinions, based on more than 30 years of writing about this stuff, is
as valid as others who were formally schooled in economics and the
stock market. (And who, by the way, seem to get it wrong as much as
they get it right.)
Readers should note that Greenberg concludes that any formal training in economics is irrelevant. It is enough to be an observer of the scene. Does this really make sense? This is an important subject, to which we shall return in future articles. Most real economists are too polite to point out the errors when on a program with non-economists. The guests all speak in generalities.
Our Take
Let us apply a little common sense to this situation. On the one hand we have people, very intelligent people just as smart as Herb Greenberg, who spend many years acquiring training and experience in certain methods. These people then apply the methods in specific situations and make forecasts, some right, some wrong. It is easy to disparage their work by picking out those who were wrong and focusing on the mistakes.
On the other hand we have someone who does not acquire the training and knowledge, but concludes that it is irrelevant. That is what the consumer of information should consider. Anyone who does not realize the value of expertise is in for a big surprise.
Current Market Mistakes
Because of the various challenges — the general economy, the housing market, the credit market, the risk in CDO’s — there is–right now– an especially important interface between economics and government. It would be wise for investors to seek out genuine experts in both subjects.
Most current commentators have expertise in neither.
Current issues include the following:
Fed policy, where those who maintained that the "Fed was in a box" have been proven wrong. Have any of them admitted this? Have they simply switched arguments to some future problem?
Inter-bank lending, where many predicted incorrectly that LIBOR rates would not fall. They underestimated the effect of the Fed’s innovative TAF approach, something we highlighted.
Bond insurer issues, where people with absolutely no experience with government policy making — none whatsoever — make daily arguments about why any effort will fail. The key argument is that the Treasury SIV approach failed, so a bond insurer effort will also fail. We think that this idea is both shallow and erroneous.
As far as we know, we are the only Internet source that takes a genuine public policy perspective to identifying experts and trying to predict government actions through knowledge. If one is looking for an investment edge based upon true expertise, this is the place. Most of the Internet gatekeepers, even the very best, just cite the stories from popular blogs and rely upon the caveat emptor principle.
This puts the burden upon the reader. The gatekeepers are quite honest about this, but how many readers have the critical skills and insight to analyze what they see?
We shall return to the bond insurer versus the SIV question, but we hope that readers will first consider the challenge we posed. It is essential in understanding the conclusion.
I don’t know, Jeff. I felt convicted after reading this. I know that I get calls wrong, but as a generalist, I have to try to interpret what is going on, and put forth my best guess even if I will be wrong. And I have been wrong.
But, I’ve been right more often, I think. So, part of my price for making good points is that I will blow it now and then. As at RealMoney, I have learned that admitting mistakes builds credibility, rather than destroying it.
My only hesitation is that it sometimes takes a while before I know that I was wrong. I have beat on several issues and seemed wrong for a while before things went the way I expected. Prognostication is tough, and measurement of results is an inexact affair.
Anyway, I liked this post. Good finance bloggers must be careful, but not so careful that they never err. No one would write anything then.
Interesting and thoughtful post.
I am a consumer of information from various media sources and the blogosphere. I try to read a variety of sources and different perspectives on issues. I regularly read you, Ritholtz, Hussman, Smart Money blog, Dr. Brett Steenbarger, watch some Cramer etc., and many, many other sources.
Ultimately, I and NO ONE ELSE bears responsibility for what information I choose to overweight and which to discount and how various perspectives may or may not influence my own decision making. All consumers of information bear this responsibility. Anyone passing off responsibility to Barry Ritholz, or Jeff Miller, or whoever for their own investment decisions really shouldn’t be in the game.
Bottom line, at the end of the day, the “proof is in the pudding” so to speak. I stay ****ACUTELY AWARE**** of who said what when (there is no escaping past proclamations on the Internet), and I hold them accountable in my own mind as to what value their content provides. Over the next 12-18 months many questions will be answered and we will find out who was right and who was wrong on many key issues such as the “recession” issue. At least to me, that gives me additional information about who I should pay closer attention to in the future and whose information/perspective should be underweighted.
As an example, I have basically concluded that Cramer’s perspective/advice is largely worthless. Daily Options Report blog has done a good job of showing his flip-flopping and utter lack of accountability or consistency on anything. Santelli also did an effective job of calling BS on him.
Is the blogosphere too negative/bearish? Maybe, but I think it serves as a good counterbalance to the basically perma-bullish attitude in the rest of the media just as Fox provides a counterbalance to the general left-leaning tilt of the rest of mainstream media. An alternative perspective has to come from somewhere, and people wanting to hear the opposite seek it out in the blogosphere since it isn’t available anywhere else. I realize some take issue with Ritholtz, and throw him in the perma-bear camp, although he has disputed this characterization, but if one wants an alternative perspective from what is presented on CNBC all day long, that is the place to go.
One blogger is fond of pointing out that most of this macro stuff is unnecessary and just noise to the actual bottom-line investment decision making process. I think I mostly agree. Does my 15% allocation to Berkshire Hathaway have anything to do with BLS job numbers, CPI, Fed policy? Probably not. Does my position in a cheaply valued natural gas producer have anything to do with those issues? Probably not. Far more important is me handicapping the odds of natural gas versus coal playing a bigger role in future electricity generation.
I think an important issue for investors is not just evaluating sources of information, but also differentiating between information that is valuable or worthless to the actual success of the investment process. Many “issues” (especially macro) can be largely ignored with no impact on long-term results. Buffett and Lynch are example of that.
Just read David’s comment. FWIW, IMO, you shouldn’t feel “convicted”
I forgot to mention Aleph Blog in my previous comment. I just want to say it is near the ABSOLUTE TOP of my must read blogs, and frankly I think David does the best job out there of presenting a balanced perspective and not getting wrapped up in the whole “permabull-permabear” nonsense. At least for me, Aleph Blog is the go to place when I want to get a balanced perspective on the Fed and don’t want to get either pure Fed castigators or cheerleaders.
I think David hits the nail on the head with respect to “admitting mistakes” and “credibility”. Anyone involved with the market 5+ years realizes nobody is infallible and gets them all right. Admitting an error, and trying to figure out why one was wrong is critical. At least for me, bloggers who pretend like they never wrote or said something in the past that turned out incorrect will lose alot of credibility.
David – As you might have noticed, I recently wrote a comment on RealMoney about what I called a possible “chilling effect.” We are all expected to make interpretations of what is happening. Many people analyze stocks and offer opinions. As you wisely note, we are often wrong. It goes with the territory. My stock record last year was excellent, but I had some clunkers — mostly biotech calls like Amgen.
What I am trying to say here is a bit different, and I’ll try to sharpen it up in future posts. There is a difference between the democratic exercise of opinion about what government should do and the objective analysis of government behavior.
Those who spent many years learning how to analyze government (like me) know that there is a method. You look at past decisions, the reasoning process followed, and what factors are important. You use this as a context for interpreting current data.
If you want to predict Fed moves, for example, one should look to those who have read books about the Fed, know organization theory, know bureaucratic behavior, have read about a bunch of old decisions, and study the economic data through their eyes.
Those who force their own ideas on the Fed are offering opinions about what they think should happen, not analyzing likely behavior. It is democracy in action, but not social science.
I try — very hard — to look for those who really know their fields. You are the expert in a wide range of issues, including but not limited to insurance, accounting and actuarial questions, and personal finance. When I have questions on these topics, I often raise them to you on your blog. Then I listen carefully for your answer.
My main idea here is that there is also a body of expertise in economics, behavioral study of political institutions, and policy making.
The Internet audience is charmed by those who say that everyone in government is stupid. It plays to the predisposition of every student I had entering Poli Sci 100, and everyone who never took the course. It is amazing how the attitude changes when students study Congressional norms, socialization, and the committee process.
I am confident that if Herb Greenberg took a night course in economics his work would instantly become even more valuable, and his attitude would change a bit.
Since bloggers and commentators are not willing to use self-restraint, the burden is on the consumer.
I know several individual investors who missed a doubling of the market in recent years by reading bearish blogs. For them, reading these sources was quite costly. What is your own experience with investors?
I very much appreciate your comment, and the post was certainly not directed at your work. You have helped many.
Jeff
Mike C.
Thanks for yet another helpful comment. I cannot say enough how much I appreciate having some intelligent and thoughtful readers who are willing to share their viewpoints.
One theme I am trying to explain is that it takes skill to interpret information, partly because so much of it is misleading. Your personal skills allow you to see through much of this and form reasonable conclusions. You have investment positions that reflect this process.
My book audience is the intelligent investor just starting to get information online. I respectfully suggest that the average person meeting this description would not do as well as you have done. These people read the scare stuff and go to cash.
One point where I disagree with your comment is on the recession question. No one knows whether a recession is imminent or not, despite the many confident predictions. It is a matter of probability and how much is already “in the market.”
Only those who are making near 100% calls can be either right or wrong. Some of them have already exceeded the statute of limitations.
Like you, I am a Buffett fan. There are many companies I like right now — companies that have recession forecasts built in. Railroads come to mind, as well as others like CAT.
I have a special request to make. Imagine this investor: Someone who has watched a TV ad that convinced him that his advisor was an idiot and he could do better managing his own money.
That is my target audience. These people are likely to make many mistakes — chasing last year’s or last month’s winners, following tips, or expecting a financial disaster.
I am trying to help them. How would you do that?
Thanks,
Jeff
“I have a special request to make. Imagine this investor: Someone who has watched a TV ad that convinced him that his advisor was an idiot and he could do better managing his own money.
That is my target audience. These people are likely to make many mistakes — chasing last year’s or last month’s winners, following tips, or expecting a financial disaster.
I am trying to help them. How would you do that?”
This is such an extremely difficult question. I really have no good answer to this. Unfortunately, many of the online brokers advertising makes the investment process sound so simple and easy. I truly must admit the TD Ameritrade commercials with the Law and Order guy make me want to puke. Check the stars on an S&P report, look at a few technical indicators or fundamental statistics, and voila, that is all you need to do to buy stocks that go up. If it were only that easy.
I’m not sure the individual investor who chooses to go down this path without truly educating themself can be persuaded this is not a wise course of action, and that successful investing isn’t elementary school arithmetic.
Unfortunately, I think it will take a few years+ of managing their own account and blowing themself up to realize it is more difficult then the commercials lead on.
I guess my thought/suggestion is that the individual investor wanting to go it alone, shouldn’t start with online blogs, but should start with forming a coherent and proven investment philosophy/process. You are so absolutely 100% correct on your points about the difference between process and outcome. Most people instinctively believe a good outcome must be the result of a good process and a bad outcome the result of a bad process.
How does one explain the difference between the outcome of a single instance versus many, many repeated trials over a long enough period of time? I truly do not know. I am absolutely convinced based on my interactions that only a small fraction of people are wired to think in terms of probabilities instead of a single anecdote or instance.
I was reading your archives some time back, and you had an excellent post on something I had NOT been previously aware of, and that was that Berkshire had underperformed for 4 consecutive years in the 70s (72-75 IIRC). Most people would have abandoned Berkshire because of the recency bias and concluded he was an idiot who had “lost it”. The main thing that would have had an investor stick with Berkshire would have been a strong belief in his investment philosophy and process (value investing) and an examination of his longer-term record in the 50s and 60s.
I think I am starting to ramble on. I respect your effort and intention here, but the cynic in me says that people who believe or want to believe that investing is very easy, and all you have to do is check a few blogs and act on their recommendations without first learning corporate finance, accounting, concepts like cash flow versus earnings, what is already “priced in” or “discounted”, reading the classics like Intelligent Investor, Phil Fisher, CANSLIM by O’ Neill, etc. are beyond helping. The market will teach them the hard way.
I have learned so much just by reading this post and its comments. I am one of those who thought it would be easy to invest. I have most of my money invested through a financial advisor in mutual funds. However, I wanted to try daytrading, which I found out was a mistake, and too stressful for me.
I am trying to learn about earnings and cash flow and other aspects of sound investing. I really don’t know much about investing in individual stocks as a look at my blog will tell you. As for my blog, I don’t even know if there is anything there that could be helpful to others who are thinking about delving into the stock market. I guess I am trying to warn people, through my own mistakes, that it isn’t easy and not to expect quick cash. It usually doesn’t happen that way.
I respect people with expertise on subjects I know little about.
Thanks for your very informative blog.
The key point to remember is that paper qualifications and popularity are totally different phenomena from expertise. Sometimes they are found together, sometimes they are not. I would go so far as to say that paper qualifications are only weakly correlated with true expertise, and that popularity is *negatively* correlated with it.
Mike, how many years in a row does one have to predict a recession before they “lose credibility?” How many years in a row does one have to predict a stock market crash before they “lose credibility?” How many years in a row does one have to state that market conditions are unfavorable, while the market is rising, before they “lose credibility?” I know you tried a “gotcha!” on an old post of mine that was negative on gold, without realizing that I had another old post describing conditions where I would get bullish on gold again, and that I had several times since then mentioned trading gold and the gold miners from the long side. Have you attempted similar “gotcha!”s on blogs which have been persistently negative on the economy and the U.S. stock market for the past 4-5 years?
Has anyone on this thread *ACTUALLY*WATCHED* CNBC? Every question for every analyst has been “recession” for several months, now. Today they interviewed a bottom-up analyst about Disney stock and grilled him repeatedly about the impact of the recession on their theme park business. This is hardly “cheerleading.” If you think they are still “bubblevision,” I strongly suggest you TIVO this week’s analysts’ interviews and watch them all at once this Saturday, and see if that doesn’t change your mind.
I agree that most people cannot think probabilistically. I will go further and say that most people are not equipped to think logically. Further, most people lack the self-knowledge needed to deal with the emotional content of managing their trading for maximum impact. All of this is in *ADDITION*TO* the knowledge gap they have. Literally, most people are better off allocating to various asset indices and leaving the speculation for others, but unfortunately for them (and fortunately for others), their lack of self-knowledge keeps them in the game.
Hi Jeff,
A very timely post and comments. As one of the brought inTV pundits over in Europe who also happens to be a properly trained Economist, credit analyst, stock analyst and has worked in just about every asset class there is over the years – FX, distressed debt, emerging markets etc. I take GREAT delight in rejecting out of hand – on air – the vast majority of CNBC editorially imposed preconditions of recession or – six months ago -the never ending wonder of Private Equity. (The secret is never allow yourself to be edited. Always do interviews live.)I guess the fact that they keep on inviting me back suggests either desperation or some willingness to accept that – now and then – an opposing point of view is of some use. Could add much on this subject – but for now just congrats on your great blog.
Bill,
FWIW, and not that it really matters, I didn’t go out seeking to get a “gotcha” on you with the gold comment. I stumbled on the comment while just perusing and I guess what struck me about it was the absolute emphatic, authoritative tone as in the “gold bull is most certainly and undoubtedly over”.
You are obviously a smart guy. We probably agree on alot more (both investing and politics) then you would think. I don’t know. I’ve been involved with the markets for 12 years now, and one of the biggest things I’ve learned is humility. The markets will humble you if you get overly cocky about your conclusions. Always better to say my analysis suggests X, Y, and Z rather then make declarative proclamations of what must absolutely be the case. That is what leaves you open to looking really, really stupid 6-18 months down the road.
As far as your questions, again, one of the extremely difficult things IMO is what is the proper time frame for measurement. As I referenced previously, and Jeff posted about in the past, Warren Buffett underperformed the market for 4 consecutive years in the 70s. Was he an idiot who “lost credibility” at that point in time.
Bill Miller has absolutely stunk up the joint for the last 2 years. I think Value Trust was the absolute worst performer in its category in 2007. Has he turned into a moron? Frankly, I do not have confidence in his process and version of “value investing” so I would not invest with him. IMO, his process is more “buy the dips” then true “margin of safety” value investing that say a Buffett practices.
Where is the cutoff on being wrong versus being early? 1 year, 2 years. I don’t have a good answer to that question, but based on what I’ve read from you, you seem to dispute the very existence of a business/market cycle, but IMO one does have to balance missed opportunity costs during the up part of the cycle versus capital preservation/minimizing drawdowns during the down part of the cycle which is no easy task. I’m not sure I’m ready to join the camp that says down cycles don’t exist anymore or that they will be much shallower then the past although that is certainly a possibility.
I’d be careful not to confuse the performance of BRK/A stock with the profitability of W.E.B.’s stock picks. They are TWO*DIFFERENT*THINGS. Even using the book value of BRK/A’s total holdings is a flawed methodology, as they are not necessarily marked to market in the same way that a portfolio would be. So I’d like to see the documentation and methodology for the assessment mentioned.
Hmm, I am joining an esteemed list of your regular reads, who make declarative statements on a frequent basis.
We need some agreement on robust definitions for “business cycle” and “bear market” in order to meaningfully continue.
The cutoff from “early” to “wrong” is profit. Obviously position sizing and issue choice have an impact, as well as timing.
Bill,
This is the post I was referring to:
https://www.dashofinsight.com/a_dash_of_insight/2006/06/the_big_mistake.html
I fully understand there is a difference between the performance of Berkshire the stock and Warren Buffett’s stock picks. Still, you could think of Berkshire (especially in the 70s before he owned alot of operating subsidiaries) as a closed end mutual fund. Viewed from that perspective, then probably at the end of 1975 it was trading well below NAV. However, you want to splice and dice it, the point is you would have to come to the wrong conclusion about the merits of investing in Berkshire or with Buffett simply by looking at the 4-year performance from 72-75 without some sort of qualitative analysis of why.
Yes, I read your blog regularly. You do some really good work when you post stuff like the Fundatechnical post or How to Turn Academic Research into a methodology. Its your blog and obviously your prerogative but it is at its least useful or interesting when you use it to take potshots at other bloggers or money managers. Your rotation model is very interesting and there is some overlap with what I do at least in terms of the asset class diversification across stocks, countries, currencie, commodities, etc. I couldn’t find a post on how you exactly calculate your score for momentum. Is that proprietary?
I’m not sure what you mean by “robust”. If you look at the market over the past 100 years, it is clear there are periods of advancement followed by retracements. The conventional definition of a 20% decline works just fine for me. If you look at corporate earnings in aggregate over a very long time frame like 50+ years it is also clear they advance around 6-7% a year with multi-year expansions followed by temporary contractions. Maybe these cycles no longer exist, and down markets of more then 20% are a thing of the past, and earnings can grow at 10%+ year after year after year after year, ad infintum.
Obviously, where the more pessimistic like Hussman got it wrong is they underestimated the magnitude of earnings growth since 2003. Time will tell, but I suspect where the optimists may get it wrong is in thinking that the contraction part of the earnings cycle no longer exists. We shall see.
Still, it is a market of stocks, and there are compelling individual opportunities if one looks hard enough. I continue to believe Berkshire looks attractive.
FWIW,
Some stuff on the earnings cycle:
http://www.crestmontresearch.com/pdfs/Stock%20Beyond%20Horizon.pdf
http://contrarianedge.com/2008/02/04/down-to-the-last-drop-of-profit-growth/
Again, perhaps these cycles no longer exist due to structural changes in the economy, superior Fed policy, etc.
By “robust” I mean that it should be:
* limited. bull/bear market … for WHAT? Bonds, domestic stocks, foreign stocks, real estate? Sectors or industries? If more general i.e. “stocks,” name the appropriate index used.
* objective. Give anyone the data, they can delineate where we are.
* in the NOW. Changes can be noticed at the moment they occur.
* useful. It should be statistically valid to say that buy+hold in a bull market is better than buy+hold in a bear market. Ditto with cycle definitions and growth in whatever is used as the metric (GDP, etc.)
Any definition of the cycle that doesn’t include those points is useless, and really not worth discussing much.
Upon some reflection, I believe the most accurate reflection of WEB’s stock selection methodology would be the equity-weighted composite of stock total return, from those companies in which he owns some, but not all, of the stock.
This ensures a proper mark to market, similar to that any other stock trader gets, and ensures that we are measuring his stock trading skill, and not management skill, impact of providing capital backing, etc.
In the 1970’s, did most stock market investors view BRK/A as a closed-end mutual fund? Was it marketed as such? Or was it treated as any other industrial stock was at the time? I don’t believe we can draw ANY conclusions on the performance of WEB’s stock trading methods from the stock price performance of the holding company that includes businesses run for their own profit, companies held in total, and a large group of other investments which may or may not be all stock-market related.
I’m not sure I follow where you are trying to go with Berkshire and Buffett (what question are we trying to answer?). I think we’ve gone way off the original point which is that an investor would have made an incorrect decision about investing in Berkshire had they simply looked at its stock price performance over a 4-year time frame.
There is an academic study that looked at Buffett’s stock-picking. Here is a cut and paste. I’m sure you can find the paper
Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway Gerald S. Martin* Texas A&M University John Puthenpurackal Ohio University Abstract: The stock portfolio of Berkshire Hathaway, comprising primarily of stocks of large-cap companies, has beaten the S&P 500 index in 20 out of 24 years for the time period 1980-2003. In addition, the average annual return of Berkshire Hathaway’s stock portfolio exceeds the average annual return of the S&P 500 by 12.24% over this time period. We examine various potential explanations for Berkshire Hathaway’s investment performance. We first explore the explanation that Berkshire Hathaway’s performance may be due to pure luck. We find that while beating the market in 20 out of 24 years is possible due to luck at a 5% significance level, incorporating the magnitude by which Berkshire beats the market makes the “luck” explanation unlikely. After employing sophisticated adjustments for risk, we find that Berkshire’s high returns can not be explained by high risk. Specifically, over the time period 1980-2003, we find that Berkshire’s stock portfolio provides a positive annualized calendar time abnormal return of 8.56% using a benchmark portfolio consisting of returns taken from the value weighted twenty-five Fama and French size and book-to-market portfolios and 11.38% using a benchmark of value weighted returns of all stocks in CRSP. Ruling out the major alternate explanations to Berkshire’s investment performance leaves us with the potential explanation that Warren Buffett is an investor with superior stock-picking skills that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns. Consistent with this explanation, we find a significant positive stock price reaction around the announcement that Berkshire has acquired a stock suggesting that Berkshire’s investments are viewed as positive information signals by the stock market.
In any case, I can’t buy a mutual fund that is an “equal-weight of Buffett’s individual stock-picks”. Berkshire is the only option to get access to Buffett. I think Buffett would classify himself more as a “capital allocator” then a “stock-picker” as he deploys capital in many ways besides just picking stocks. Frankly, I think this is probably superior to a mutual fund. A mutual fund will always be valued at exactly NAV. The market from time to time misprices Berkshire stock, and allows the shrewd investor to get access to Buffett’s skill on the cheap.
I have used a “multiple consecutive years of underperformance” critique of fund manager methodology in commenting on John Hussman’s funds.
We got onto Warren E. Buffett through your “early 70s BRK/A performance” attack on my “multiple consecutive years of underperformance” critique, apparently trying to show that if it were wrong for WEB in the early 1970s, it was possibly wrong for Hussman.
My response was that BRK/A stock performance and the performance of WEB’s stock trading portfolio are TWO*DIFFERENT*THINGS. I also suggested a methodology for evaluating WEB’s trading performance.
The paper you mentioned is here:
http://www.beearly.com/pdfFiles/Buffett28102005.pdf
It does use my suggested methodology (Gig’m Aggies! Maroon OUT!), but it is limited to 1980 and afterwards, leaving the question of his actual trading performance in the 1970s very much open.
The paper’s data on Table 6 does show an overall correlation between BRK/A and the performance of their trading portfolio, as well as cross-correlations to the broad market and the value-weighted index. Aside from the overall correlation, there are periods of time where the BRK/A stock UNDERperformed the broad market at the same time that the WEB trading portfolio OUTperformed the broad market.
Considering the lack of data on WEB’s trading performance in the 1970s, and the actuality that WEB’s trading performance can and has exceeded the broad market while the stock of BRK/A has underperformed, I conclude that my original assertion is correct in essence: BRK/A stock performance and the performance of WEB’s stock trading portfolio are TWO*DIFFERENT*THINGS, and we can draw no definite parallels to WEB’s trading performance in a small stretch of the early 1970s based on the performance of BRK/A stock.
It’s also interesting to see that WEB’s trading portfolio has only ONE three-year stretch where it performed significantly worse than the broad market (1997-1999), but by the end of next year his performance was equal, and by the end of 2001 his three-year outperformance again was shown. Considering the low turnover in his portfolio as a mitigating factor, I think the data shows my original hypothesis about multiple years of underperformance to be correct, and not misleading at all, when applied to WEB.
Read my comment here:
https://www.dashofinsight.com/a_dash_of_insight/2008/01/new-years-resol.html#comment-95686266
“3 years is enough of a record to detect a flawed methodology, given the stated fund purpose in the prospectus and turnover rate of the assets. 5 years, more than enough.”
It’s obvious from that comment, and from others I’ve made here and on my blog, that I view low (high) turnover as stretching (compressing) the allowable timeframe for evaluation. Hussman’s turnover is very high, compared to Buffett’s. I thought four years was enough time to evaluate Hussman’s methodology as flawed, and I still think so. Five years? More than enough.
I also continue to hold that BEARX is a better bear market fund than HSGFX for those so inclined. You can also see that statement in various previous comments here.
Oh, no express recommendation here or above, I am unqualified to recommend anything, as I am not an investment professional. Consult your own.
Mike, here is an idea.
http://wisdomfund.com/
“The Wisdom Fund seeks to emulate as closely as possible the investment management policies of Berkshire Hathaway Holdings (BHH). The Fund will seek to achieve this objective by investing as closely as possible in the securities known to be owned by BHH. BHH generally holds investments in common stocks of both publicly traded and privately held companies. The Fund’s holdings will be primarily composed of both securities substantially identical to those publicly traded securities owned by BHH, and securities which the advisor believes possess similar characteristics to those of the privately held companies owned by Berkshire Hathaway, to the extent those investments
by Berkshire Hathaway are publicly known. It is the intent of the Fund to own each securiy in the same relative percentage as that security represents in the total investment portfolio of BHH.”
Thanks for the idea. I’ll have to consult myself. 🙂
Took a quick look. Berkshire has pretty much outperformed the fund, especially during the last 6 months of market volatility and correction. I’m on record in another forum (Motley Fool) in early 06 anticipating that Berkshire would likely outperform during a period of increased market volatility.
I’ve mentioned this before. Berkshire is ALOT MORE then just a collection of stock-picks. In my view, in owning Berkshire one also has exposure to embedded put options on market downside due to the cash position and the presumption Buffett can put money to work. Additionally, much of Buffett’s value creation in recent years has been in moves OTHER THEN STOCK PURCHASES. For example, he has recently purchased high-quality businesses like Iscar and Marmon at valuation multiples generally not available in the publicly traded markets. Berkshire is often the top choice for motivated sellers, and so Buffett can get a very good price when buying entire businesses.
It is highly unlikely that a mutual fund that copies just his stock-picks after the fact can match his value creation when he can make currency bets, buy high-yield bonds when they are bargains (2002) and numerous other ways he can create value for shareholders besides buying publicly traded stocks. Of course, the risk is he could die sometime soon. In any case, I’m reasonably confident Berkshire the stock will continue to outperform the Wisdom Fund referenced over the next 3-5 years as long as Buffett continues to be the man in charge.
Your other response is …… ummm, puzzling. Go back and read EXACTLY what I wrote on Berkshire’s performance for the stretch in the 70s in my INITIAL comment. I was making a simple observation of a time period of performance for someone who was a skilled investor. THERE IS ABSOLUTELY NO MENTION WHATSOEVER OF HUSSMAN, YOU, or any “attack” on a “critique” you made. You seemed to have pulled that 1000 miles out of left field. You really need to stick to the words written on the page, and not try to read in some hidden meaning or subtext that isn’t there. A multi-year stretch of underperformance could just as easily apply to a Bill Miller or Bill Nygren who haven’t done well versus the market for a 5-year cumulative stretch yet one could argue are still superior investors.
I have Buffett’s partnership letters from the 50s and 60s. He blew the market away in the 50s and 60s, and as the paper demonstrates beat it from 80+. I think it is reasonable that he likely outperformed in the 70s as well. In any case, the fact that the stock underperformed should HIGHLIGHT THE OPPORTUNITY that exists when that it the case. In fact, one could probably argue that anytime the stock does underperform meaningfully given his status as a superior investor, that is probably the time to be backing up the truck and buying. That was certainly the case over the last 4 years.
I don’t want to beat a dead horse or just create noise so this is my final response on this thread. You can have the last word if you want.
This phenomenon is not restricted to the financial arena. The web has a unique problem which you so amply stated – anyone and everyone bar none is able to add content. Added to that, there are no content editors or content police to ensure that the content meets minimal standards. Imagine if our children were taught in school by anyone who applied for a teaching certificate – in a world where there were no rules or regulations or minimum standards for teachers! I don’t have the answer but I see a movement towards more niche social circle where smaller groups of people can police each others content.