Buffett's Investment Record-Luck or Skill?

Nassim Taleb, author of Black Swan, was recently quoted as saying "I'm not saying Buffett doesn't have skill-I'm just saying we don't have enough evidence to say Buffett isn't doing it by chance."

For the record, over the past 45 years the book value of Berkshire Hathaway's stock has grown at a rate of 20% plus while the Standard & Poors 500 index has appreciated by a rate of 10% plus. It's difficult to understand what evidence Mr Taleb is missing.

I suggest that he read Mr. Buffett's article, The Superinvestors of Graham-and-Doddsville, an edited transcript of a talk he gave at Columbia University in 1984.

A few excerpts follow:

Is the Graham and Dodd "look for values with a significant margin of safety relative to prices" approach to security analysis out of date? Many of the professors who write textbooks today say yes. They argue that the stock market is efficient; that is, that stock prices reflect everything tat is known about a company's prospects and about the state of the economy. There are no undervalued stocks, these theorists argue, because there there are smart analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky......Well, maybe. But I want to present you with a group of investors who have, year in and year out, beaten the Standard & Poors 500 stock index.

The common intellectual theme of the investors of Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market.....Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of interest to them. In fact, most of them would have difficulty defining these terms. The investors simply focus on two variables: price and value.

While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.

I urge Mr. Taleb read the entire article, which many consider to be the best on investing ever written.