|
The specific article ( Super Investors of Graham and Dodd'sville)
I
mentioned gives the case study of five or six of Benjamin Graham's disciples who have outperformed the market over a significantly long period of time. While Buffett has hogged the limelight but there are many others, not as well known, who come from the same intellectual school of investing and have statistically outperformed the market over long period of time. To use your own analogy, if six Micheal Jordans came to NBA from the same high school and had similar averages clearly somebody needs to take notice and study why such a disproportionate people have performed so stupendously. I am not sure if one can dismiss such evidence as a freak event. If you take the entire market then many players attain sub-indice performance. These I am sure will be the majority. However there are a few (such as Buffett) who gain substantially at the expense of the majority. If you measure this situation and ask the question does the majority under the perform the index of just about match the index, the answer will be an resounding and obvious yes. But the real question is whether there were any clustering in the attributes of the minority who consistently beat the market. If there is a strong clustering of attributes (they ate the same brand of corn flakes for many many years or went to the same school or followed the principles of the same Guru of investing or whatever ...) obviously then there is some causal variable that may explain the phenomenon and it would not be scientific to dismiss this clustering by taking the argument that majority under performs the market anyway. The real question is whether the hypothesis should be built on the underperformance of the majority or on the outperformance of the minority (if it is strongly clustered) It is in this context that I would like you to look at the article which takes the hypothesis of the strongly clustered minority to find out if markets are efficient. I strongly suggest that those interested in this field should at least read the article. Regards Koushik ----- Original Message ----- From: "Alex Tabarrok" <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Thursday, April 04, 2002 10:42 PM Subject: Re: Securities analysis > There are actually two issues 1) Is the market efficient? and 2) Can > someone, using public information, systematically earn higher returns > than those on a suitably risk-adjusted market basket? > > These issues are related but they are not the same. If the market > is efficient the answer to the second question is certainly no. If the > market is inefficient, however, it does not follow that the answer (in > practice) to the second question is yes. Some types of inefficiencies > such as two different prices for the same good can and will be > eliminated through profitable arbitrage but when arbitrage is not > possible eliminating market inefficiencies is risky. Even if you knew > that X was a bubble, for example, you can short the stock but you then > run the risk of the bubble flying much higher before it bursts. > Essentially, the failure of Long Term Capital Management was precisely > this problem - right theory but they ran out of capital before they > could profit from the elimination of the inefficiency. > > In addition, we must also face the fact that if the market is > inefficient due to investor irrationality it is very likely that we > (yes, you and I) and our agents are also irrational in some respects. > > Thus if we care about issue 2 then pointing to bubbles of the past > or arguing that people are irrational or greedy etc. misses the point. > The real test of issue 2 is, Do portfolio managers/stock picking > newsletters or other active strategies outperform a passive index > strategy? And the answer to this question is a resounding NO. Taken as > a group and taking into account transaction costs the active strategies > actually *underperform* the indexing strategy. I don't know anyone who > disputes this finding - note that whether this is because the market is > efficient or portfolio managers are just as irrational as everyone else > is open to question but not relevant to question 2. > > At any given time, of course, some portfolio managers beat the > market but, again as a group, no more than you would expect by chance. > Of course there are a few outliers, Warren Buffet and Templeton, for > example. It's quite reasonable to mark these down as a chance but my > own view is that there are a few geniuses out there and that Buffet is > to stock picking what Michael Jordan was to basketball. I no more think > that I could duplicate what Buffet does than I could duplicate what > Michael Jordan does even if Jordan wrote a book explaining how he plays > the game. (Indeed, careful observers of Buffet find that how his > investing decisions cannot be explained soley by reference to his rules > of investing.) > > Alex > > > > > -- > Dr. Alexander Tabarrok > Vice President and Director of Research > The Independent Institute > 100 Swan Way > Oakland, CA, 94621-1428 > Tel. 510-632-1366, FAX: 510-568-6040 > Email: [EMAIL PROTECTED] >
|
BEGIN:VCARD VERSION:2.1 N:Sekhar;Koushik FN:Koushik Sekhar TEL;HOME;VOICE:91 22 3643451 TEL;CELL;VOICE:98202 28958 TEL;HOME;FAX:91 22 3676518 ADR;WORK;ENCODING=QUOTED-PRINTABLE:;;5th flr Baug E Sara=0D=0A16 Nepean Sea Rd=0D=0A;Mumbai;Maharashtra;400036;= INDIA LABEL;WORK;ENCODING=QUOTED-PRINTABLE:5th flr Baug E Sara=0D=0A16 Nepean Sea Rd=0D=0A=0D=0AMumbai, Maharashtra 400= 036=0D=0AINDIA EMAIL;PREF;INTERNET:[EMAIL PROTECTED] REV:20020404T181853Z END:VCARD
