Hmm. Wonder how much the fact that âthe WaPo pension is still in rude health todayâ influenced Jeff Bezosâ decision to buy that company. Does control of that pension fund come with the purchase?
A great (+ short) book in the same vein is by two guys named Goldie and Murray called âThe Investment Answerâ. Murray was a bond salesman at Goldman and a managing director at Lehman, but upon discovering that he had terminal brain cancer, he wanted to write some truth about how to invest in the market. Their advice echos that from this memo, but he goes into a little bit more depth about how to break free from the system. Itâs a short read - a few hours. I really liked it.
Hereâs a NYT article about the book. http://www.nytimes.com/2010/11/27/your-money/27money.html?pagewanted=all
Three links deep and the entire Buffet memo is behind a paywall, it seems. Thatâs okay - I think anyone who has followed Buffet for even a short time knows his basic strategy is âbuy into good companies and hold on for the long termâ. If you want his judgement on what a good company is, I guess you have to buy a share in Berkshire.
Is ârude healthâ good or bad?
Normally union pension funds have a board of directors who oversee the pension plan made up of union and management people. That Bezos as owner may have input as to who gets on that board, and who they hire to actively manage the pension is a question that might be hard to answer at this point.
I think Bezos bought WaPo because he wants a platform for his libertarian views, and its prestigious to own one of the two key US newspapers. There are possible âsynergiesâ between Amazon and WaPo, but Iâm not really sure what they would be.
There have been other studies and anecdotes that show even investment bank traders donât do very well once they leave the bank to create their own company. The main reason they donât do well is that they overestimated their own agency in their initial success, ignoring the fact that they were privy to massive amounts of investment information while inside the banks. For example, the large investment banks perform massive trades in the bond and stock markets (esp. bond) on a regular basis for all variety of companies in different industries. That information alone helps traders to see whatâs happening in the markets in a deeper way than those outside large investment houses and allows them to make profits they otherwise wouldnât make.
I read about this on NakedCapitalism some time ago, I just canât find the link right now.
Good. Just a slightly archaic phrasing. Itâs a phrase Iâm fond of.
Itâs funny how upset those âexpertâ money manager can get when you tell them âIâm looking for a diversified, market-representative portfolio with no delusions of cleverness, anything further is just a transaction cost.â
On the plus side, you can safely rule out the ones who react badly and take your money elsewhere. Sure, we all want to be astronauts when we grow up; but it isnât my fault that your performance fails to match(and your salary far exceeds) an index fund.
This is one of those examples of cognitive dissonance which would be amusing if it wasnât for its real effects.
The existence of what fund managers call âalphaâ (returns in excess of the average market performance) has been repeatedly shown not to exist over the long term. On average, there is no advantage whatsoever in employing active fund managers. Claims to the contrary are like copying the âstrategyâ of someone who has a good track record at picking lottery numbers. Given the fees that are charged for this âserviceâ, the returns are even worse. Worse still, one part of the market-fundamentalist dogma that many of these people profess is the efficient markets hypothesis, which claims that what they are trying to do is in itself impossible.
And yet the fund management system persists.
I suspect that most of them subscribe to a variant of the efficient market hypothesis, which holds that âconsistent market-beating returns are impossible for people less special than me, which is more or less all of them.â
Much of his writing is available in the Berkshire Report, or at least it was when I was in that industry.
For instance, he was shouting from the rooftops that the derivative market was a doomed house of cards starting in the early 2000âs after he bought Gen Re and found out that not only were their reserves bullshit, but that much of the worldwide reinsurance market was similarly reserved in inflated and fraudulently scored derivatives.
edit: Archive of the Berkshire shareholder letters: http://www.berkshirehathaway.com/letters/letters.html
Heh. And the Red Queen gets to stamp another silhouette; thatâs evolution, military technology, and now finance.
Also, I wonder how much the pressure to perform and get that money coming into the fund prompts the hedge managers into unethical and illegal trades out of desperation? Afterall, as the article points out, itâs like several packs of lions fighting over a single, undersized gazelle, but if the lions start raiding the human cattle herds, well, it might get the lions shot tomorrow, but today itâll feed them.
Not to excuse the roulette-playing thatâs become our financial system, but Iâm wondering what the original impetus was for that first step: greed, pride, or, alternatively, desperation to perform?
If it was true in 1975, it is even truer today when the major investment banks have computers specially placed to shave microsecond off of the time needed so complete a trade so that they can âfront runâ any major market movement by a fund.
But if people donât think they can beat the market, there wouldnât be a market in the first place. Imagine the absurdity of everyone investing in an index fund.
The system only works because people are irrational and donât do whatâs in their best interest.
Buffet is not saying that you canât beat the market. Heâs saying that you canât beat the market over the long term when investing large amounts of money. Simply put, you canât beat the market because you are the market, or you are restricted to the very companies that define the market - very large companies like those that make up the major indexes against which your performance is measured. How can you beat an index made up of IBM, Intel, Johnson & Johnson, etc. when those are the stocks you have to buy because those are the companies where a $50,000,0000 order to buy or sell wonât send the market haywire.
Buffet wouldnât tell you that âyou canât beat the marketâ because he did it for a long time. But at the beginning he was a much smaller fish. And he did it by finding situations like WaPo or Geico that were good businesses that had completely hit the skids for whatever reason and were selling for next to nothing. He had confidence enough in his research to take enormous positions (in comparison to other holdings) and was rewarded when the companies recovered. If you put 20% of your assets in 1 stock and it goes from $2 to $200 over 10 years, it will have a gigantic affect on your long term record. A small hedge fund can make bets like that, but a $20 billion pension or mutual fund canât.
And part of the âover a long period of timeâ is the fact that if you discover a successful strategy, it will be imitated by enough people that it is no longer successful. You canât have a âsecret recipeâ like Coke because trades are public.
If it influenced his decision, then in the manner of âone less thing I have to worry aboutâ. Thatâs my gut feeling.
Well, the most obvious being having a newspaper that is optimised for the Kindle family of devices. And a reason to use Kindle for iOS, because you only need one subscription for all of your devices. And using the WaPo to demonstrate to other papers the best practices for e-publishing.
After all, e-readers are better for replacing ephemeral print like newspapers and magazines than for your cherished hardbacks. 
Maybe he should start letting his secretary make investment decisions for him. His results last year were worse than mine.
