The Case Against Talented Coin Flippers

Proponents of Efficient Market Theory often dismiss the track records of superior money managers as something that ought to be expected given normal probability. They claim that it’s like calling a person who just nails ten heads in a row a superior coin flipper.
Sorry Mr. Buffett, old sport, you just got really, really lucky.
The problem I have with this is that the folks who are often listed as the top money managers seem to share some key traits—specifically they’re often value investors who have no time for EMT. If it truly were an odds game, I doubt we would see these traits appear so often.
Megan McArdle links to a post of managers who have excellent long-term track records. At the top is the late Bill Ruane who was a good friend of Warren Buffett. They met at Ben Graham’s value investing course at Columbia. In other worlds, they took the same class, learned the same lessons and both generated superior returns. There are plenty of other Graham-and-Dodd guys like Peter Lynch, or the guys at Leucadia National (LUK), and the guys at Danaher (DHR), who went on to trash the market year after year.
So it’s not just good coin tossing—it’s good coin tossing following the same coin-tossing lessons, the same coin-tossing methods taught by the same coin-tossing teachers. At what point do we agree that it ain’t just luck?
The Forbes list of billionaires contains lots of shrewd investors. I’m not aware of any that are pure technical guys. There are people who follow every conceivable strategy from astrology to Elliot Wave. Yet, time after time, it’s the value guys who rank near the top.

Posted by on August 11th, 2009 at 4:10 pm


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