Wednesday, February 10, 2010

Warren Buffett Doesn't Rely on Luck

Janet Tavakoli emails in response to comments by Nassim Nicolas Taleb who says Buffett's success may be all luck:

Warren Buffett loves luck as much as the next man, but he doesn't rely on it. As I point out in my book, Dear Mr. Buffett (Wiley 2009 P. 55):
When Nassim Nicholas Taleb, a risk theorist, discusses Buffett's success, he seems to damn it with faint praise: "I am not saying that Warren Buffett is not skilled; only that a large population of random investors will almost necessarily produce someone with his track records just by luck." If Taleb needed an example of success due to random luck, he did not choose well; he could have chosen from any number of hedge funds instead. Taleb fails to mention conditional probabilities (in this context), and it is remiss to describe Warren's success without bringing that up. Certainty is not possible, and luck is always part of the equation, but Warren works hard to uncover a margin of safety wherever possible.
If Taleb needs an example of success due to random luck, perhaps he should use the first year performance of Empirica Kurtosis, his own former "black swan" fund. The fund reportedly had a 58.8% return in 2000 followed by a loss of -8.9% in 2001, a year that Taleb called "the mother of all black swans." The fund then had double digit negative returns of -13.2% in 2002. That was followed by—at best—low single-digit gains in 2003 and 2004, a two-year period when hedge funds in general posted average returns of 20% and 9% respectively. The fund's size was around $375 million when most of the assets were returned to investors in early 2005. Original investors (in 2000) that stayed until the end would have had T-Bill returns (at the time) or worse on average. Investors who invested in 2001, but before the "black swan" event of 9/11, would have wound up with net negative returns.
Do you want to pay hedge fund management fees for that kind of performance? What would Taleb call that—lack of success due to random bad luck? One shouldn't be fooled by randomness, but there is no need to be a fool for randomness.


  1. Maybe this is why Taleb writes books now. Isn't that what you do when you can't... do?

    Those who do, do. Those who can't, teach/write books.

  2. Ouch! That was harsh. The one-two punch delivered by EPJ commentators. Tavakoli points out Taleb's mediocre money management results and Conant piles on with an old but enduring "wives tale."

    I love it!

    But I still enjoy reading Taleb.

  3. E,

    Obviously, you're right... after all, Graham and Dodd wrote the book on Buffett's technique and they very well "could do."

    Yet, I just couldn't help myself.

    Even in Taleb's book, which was edifying, he comes off as a bit more of a mouth than anything else.