Note about my last posting on Warren Buffet and George Soros: According to “dividend_growth” (thanks for the data), the following is Buffet’s P/L on his dollar trades (unverified):
2002: 297M
2003: 825M
2004: 1839M
2005: -955M
2006: 240M
Net: 2246M pretax
Now let’s study Warren Buffet, George Soros and those in between.
For simplicity, let’s assume Buffet-type investors (institutions and individuals) are basically value investors or “super longs”, and Soros-type (institutions and individuals) are basically speculative investors or “super short”, and then there are those in between, again both institutions and individuals,. Clearly those in between don’t have Buffet-type edge, or they will be Buffet-type; They don’t have Soros-type edge either, or they will be Soros-type.
As an approximate guess and graph-wise, the distribution of three group investors is almost like a reversed normal bell-shaped curve (the graph may be availale via email): X axis represents entire spectrum of investors, from “super short” Soros-type at far left end (the lowest 1st percentiles, corresponding to about -2.3 standard deviations from center of X axis (“0”, corresponding to the 50th percentile), and at the far right end being “super long” Buffet-type (the highest 99th percentile, corresponding to about 2.3 standard deviation from center of X axis). Intuitively, most investors are distributed around center of X axis, with some of them at the left trying emulating Soros and some of them on the right trying emulating Buffet.
Investment performance of investors are represented on Y axis, with “0” being the highest level(to Warrant Buffet, all the money he personally benefited from appromizes to zero anyway compared what he has made and given out), and from 0 downwards, the value becomes more and more negative. On such a reversed normal bell-shaped curve, both Soros and Buffet type investors are at the highest level of performance, with most of investors in between fall far below the level of both Soros and Buffet type investors(quite understandable, they neither keep money to themselves nor donated out like Buffet, they lost money to the market) . The graph is actually a pretty good approximation of reality.
The question again is: what set up the mass investors from Soros and Buffet-type? It is the edge. What is edge? Edge is IQ. “Chfriend03” described in my previous writing basically figured out the value of NTES and UHAL by himself through research of public information and data. Edge is also EQ and business sense (“just can smell the value”), which were kind of exemplified by Mr.Duan. Needless to say, both of them are all well-rounded investors. Edge is also knowledge, skills, experiences. Edge is a business model constructed with all the components we discussed. Looking at the graph and/or investors around, we can see some on the right side were able to move in the direction of Buffet. Through their hard work mainly in FA, they can consistently pick a few good stocks here and there, buy and hold for a while, made some money and achieved some degree of financial independence. On the left side, some investors try emulating Soros: they do both FA and TA, long and short, invest and speculate, in stocks, bonds, currencies and commodities. They have acquired some good skills and experiences, and some of them can make a living in trading.
More or less, however, most of investors in between Soros and Buffet don’t possess an edge as a group, and get victimized in the market, particularly in short term. Putting into extreme, the mass group have to continuously buy high (fair price is already over priced) from Buffet- type group. Due to the nature of the game, the mass group has no choice but buying at already-margined up retail price from Buffet-type and other wholesale guys.
Can the mass group just buy and hold for the long-term gain? As a group and on average, it’s hard to hold, for a few reasons. One, there are quite a few stocks with no or poor fundamentals get dumped onto the mass group from wholesale guys. The price of these junks will decrease close to zero over time. Two, lacking in edge, the mass group can’t really separate diamonds from rubble, and tend to throw baby together with bath water. Statically and psychologically, for the mass group and in their mindset, loss happens much more than gain in terms of both frequency and amount. Consequently, the mass group tend to sell than to hold. Besides that, there are other reasons for this short-term selling, such as leverage, derivatives, performance pressure and so on so forth.
When selling, the mass group can’t sell back to Buffer-type at same price at which they bought. Buffet type would only buys back at deep discount and only good ones. The mass group has to sell among themselves, more or less around the price when the group buys from Buffet type and other wholesales guys. The gain and loss are limited because buyers and sellers are from the same population and can’t outsmart each other significantly. This is all assuming no significant change of risk, for stock and market during this time for the sake of arguments. This is actually not a bad outcome, the gain and loss are limited, distributed and balanced out within the mass group, and the money has not left the mass group.
The brutal part of the game for the mass group comes when Soros-type marches in. Market never sits still, and Soros-type exacerbates changes to make price overshoot. During such time, the mass group’s grip on the limited rational in their minds can easily break down and emotion comes in to fill the void. The results are too well-known: the mass group sells in deep discount to Soros or Buffet type group, very often the good stocks, and buys at high premium from Soros or Buffet type group, and very often the junks.
To the financial market, it is just doing its job all these times. During the process, it provides capital to companies, bad or good, all have to be financed; It provides liquidity to investors so they can move on to the next; It punishes bad apples and rewards good apples, companies or investors with redistribution of capital; It is also the most effective information processing, sensing and signaling system for real economy and policy makers such as Fed.
While market is doing its job, real money, hard-earned or not, is legally appropriated from some and given to others, and back force, never ending. Cruelty or beauty? It’s the two sides of one coin: it is the beauty to winners and cruelty to the losers,. Some never made out of bottom and got wiped out permanently. Some made to the top and are able to hang on there, with others “topped out” and fell hard back to the base again, For the fallen ones, they are lucky if they still have their bases, as others dropped all the way and fell out of bottom totally. Those in the bottom but still have their bases very often are able to build their base into a solid one, sometimes in years and eventually break out. The “charts” of stocks and their players look awfully similar to each other. We all know that chart never lies, it always tells you something. In this case, what it tells us is one thing if I may guess: behind the seemingly randomly-played out financial game, there is rationality. One simple true is: For players, as well as for stocks, good ones with strong edge or fundamentals will eventually have their shining moments to break out, if not rising to the top. However, as always, make sure you have your base somewhere for you to fall back and hang into, just in case of false break outs, double or triple tops which we all have seen too much and too often.
