Warren Buffett: Investment Genius or Statistical Anomaly?

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Warren Buffett: Investment Genius or Statistical Anomaly?
John Price1 School of Mathematics University of New South Wales Sydney, NSW 2052, Australia and Edward Kelly School of Business Studies University of Dublin, Trinity College Ireland Keynote paper presented to the First International Workshop on Intelligent Finance: A Convergence of Mathematical Finance with Technical and Fundamental Analysis (December 13-14, 2004, Melbourne, Australia). Abstract Warren Buffett has been Chairman and CEO of Berkshire Hathaway, a general investment company, since 1965. Before that he headed various private investment partnerships. Over a period of 47 years, under Buffett’s leadership, these companies have outperformed broad market indices by an
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The very small number of really good performers we find in the investment management business actually is not at all inconsistent with the laws of chance.” In the next two sections we try to find out whether Buffett’s performance can be explained in statistical terms—or whether there really is a contribution to investing knowledge from his methods. 2. The Orangutan Coin Tossing Competition In 1984 Columbia Business School hosted a celebration of the fiftieth anniversary of Graham and Dodd’s book Security Analysis. The two principal speakers were Rochester’s Michael Jensen, an academic who had come out strongly in favour of the Efficient Market Hypothesis and Warren Buffett. Jensen stated that it was hard to tell if any of the followers of Graham and Dodd were really superior investors. He argued: If I survey a field of untalented analysts all of whom are doing nothing but flipping coins, I expect to see some who have tossed two heads in a row and even some who have tossed ten heads in a row. This was a perfect entry for Buffett who envisaged a national coin-tossing contest. Each day, everyone in the United Sates flipped a coin with only those who continually flipped heads staying in the contest. After twenty days only around 215 flippers would remain. Buffett continued (Buffett, 1984): But then some business school professor will

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