Title: Blank
The specific article ( Super Investors of Graham and Dodd'sville)
Imentioned gives the case study of five or six of Benjamin Graham's
discipleswho have outperformed the market over a significantly long period
of time.While Buffett has hogged the limelight but there are many
others, not aswell known, who come from the same intellectual school of
investing and havestatistically outperformed the market over long period of
time. To use yourown analogy, if six Micheal Jordans came to NBA from the
same high schooland had similar averages clearly somebody needs to take
notice and study whysuch a disproportionate people have performed so
stupendously. I am notsure if one can dismiss such evidence as a freak
event.If you take the entire market then many players attain
sub-indiceperformance. 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 underthe perform the index of just about match the index, the
answer will be anresounding and obvious yes.But the real
question is whether there were any clustering in theattributes of the
minority who consistently beat the market. If there is astrong clustering of
attributes (they ate the same brand of corn flakes formany many years
or went to the same school or followed the principles ofthe same Guru
of investing or whatever ...) obviously then there is somecausal
variable that may explain the phenomenon and it would not bescientific to
dismiss this clustering by taking the argument that majorityunder performs
the market anyway.The real question is whether the hypothesis should be
built on theunderperformance 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 whichtakes the hypothesis of the
strongly clustered minority to find out ifmarkets are efficient. I strongly
suggest that those interested in thisfield should at least read the
article.RegardsKoushik- Original Message
-From: "Alex Tabarrok" [EMAIL PROTECTED]To:
[EMAIL PROTECTED]Sent:
Thursday, April 04, 2002 10:42 PMSubject: 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
