Warren BuffettMatt Sayles
Jeff Matthews, who writes the Not Making This Up blog, has an interesting post on Warren Buffett - in particular, defending the Oracle against the charge that he has been lucky during his investment career.
The charges pop up frequently, and are indeed the stuff of urban legend. However, Mr. Matthews was responding to a particular quip from Nassim Nicholas Taleb, author of The Black Swan. In response to a question about who's the better investor - Mr. Buffett or George Soros - Mr. Taleb apparently sided with Mr. Soros because: "The probability Soros's returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy."
First, Mr. Matthews pointed out that Mr. Buffett has indeed engaged in currency and arbitrage plays over the years. But the more important point - and one that I think should resonate with all investors - is that Mr. Buffett isn't a less-active investor on the basis that he's bought and sold fewer positions. After all, staying put also involves decision-making because an investor must weigh the costs and benefits of switching a position - or doing anything, for that matter, even if nothing is done in the end.
Mr. Matthews explains: "For if Warren Buffett has demonstrated anything, it is that deciding not to buy (or short) something is also a decision - and frequently a harder decision to make than writing a trade ticket and going along with the mood of the market."
It's a good point. For example, good investors avoided the technology bubble last decade and perhaps also avoided U.S. financial stocks a few years ago. In other words, they did nothing - and that nothing was very smart.
David Berman