All traders require an edge and this edge should persist over time, it should not be reliant on special initial conditions or luck. The chart below shows an edge that has failed for the past two decades.
This compares Warren Buffet’s performance via his vehicle BRKA versus SPY an S&P500 ETF. As can be seen the edge Buffet once had has disappeared.
The harsh truth is that if you have had no edge for 20 years, your methodology has a flaw.
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Chris, is that failure attributed to the sheer size of the BRKA portfolio in comparison to the benchmark used. Difficult to make outsized gains if you have $130B cash to invest.
Perhaps to some degree. However, I think this has been a long decline in returns which was masked by earlier extreme returns. So this erosion went unnoticed. As to the reason for the decline in part it is because they have become a cash company. But is also that the world has moved on in terms of those companies that generate wealth as exemplified by the fact that BRKA only holds a reasonable position in a single technology stock – AAPL. If you compare BRKA performance versus QQQ its quite woeful.
As a contrast, Renaissance Technologies would make a great case study as to how to maintain an significant edge decade after the decade. Maybe a small part of that edge lies in maintaining a low profile.
I also think that part of the difference between RenTech and BRKA is that RenTech’s methodology relies upon data as opposed to story. BRKA and Buffett have always relied upon a good story this has meant that they have completely missed out on the world’s pivot to technology.
I suppose the tech developments that have occurred in markets over the last 50 years or so (especially the availability of data) has played into the hands of a skilful quant like Jim Simons. Or maybe those developments accelerated the rise of the quant. A case of the chicken or the egg. Back in Buffett and Munger’s heyday, I imagine that the data was not as readily available and not as “clean” and reliable. Given that limitation, intuition may have played a bigger part in the equation. Interesting thoughts.
Perhaps to some degree. My counterpoint would be that I first had access to electronic data and charting packages in the mid 1980’s. If I had access to it then everyone else had access to it – so his edge should not have degraded so savagely.
AI will sort out all of the edges. No one will have one.
I am not so confident as AI will still have to cope with the vagaries of human investors. It also assumes that markets will be perfectly efficient.