[sbaqai]

"[Soros] made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy."

I don't buy that. Even the shallowest read of Buffett's investment history, you'll find he's always followed a very concentrated portfolio strategy. He waits for the fat pitch, and loads up when an opportunity comes along. He's mentioned that if you were to take away his top 20 best investments, Berkshire would have a pretty average record.

Does Taleb believe more decisions increase the likelihood of reverting to the mean (ie: average returns in this case)? And by that logic, Soros has made more decisions, so that must suggest its less random, and more talent? This is a classic case of man with a hammer syndrome.

By only deploying capital when the odds are disproportionately in your favor, you are LESS likely to make errors. The less decisions, the more deliberate your actions are. Inactivity isn't a measure of luck.

[kragen]

If you have a hundred would-be Warren Buffetts who each make one investment per year, and a hundred would-be George Soroses who each make dozens of investments per year, the variance on the Buffetts' investments will be a lot bigger than the variance on the Soroses'. Consequently the richest investors out of the whole group will almost certainly be Buffetts, even if the two groups do equally well on average. In fact, the average of the Buffetts has to be quite a bit worse than that of the Soroses in order for a Soros to come out on top.

That's the argument Taleb is making: that Buffett's success is weaker evidence for the expected return of his investment strategy than Soros's success is for his.

Taleb is correct. If you think he's wrong, you don't understand his argument.

Now, you (and Buffett and Munger) argue that there's an additional reason to believe that Buffett's strategy is a good one: because fewer decisions means that each decision will be smarter. Well, you could be right. Historically, though, human beings are pretty bad at distinguishing good investment strategies from bad ones by logically analyzing their premises. So the statistical evidence Taleb is discussing counts for more, in my book.

[sbaqai]

I understand what you're saying. But don't you have to consider the number of times Buffett exercised his investment decision, and not only when he's put money up?

You'd have to consider all those deals he passed up, as using his investment strategy, no? He may make 1-2 investments a year, out of maybe 200 investments available to him that he's analyzed. Thats still 200 investment decisions, not 1 or 2, which I'm assuming Taleb is using.

Wouldn't a thorough analysis consider four possible outcomes? The first event is the decision to invest (Y/N). The second event is whether their decision worked in their favor (+/-). (Y+, Y-, N+,N-) Y+ and N- are successful use of strategy. Y- and N+ are failed strategy. Same for Soros.

Example: Consider all of the investments that were passed up, that would have been terrible investments. That could be considered successful employment of an investment strategy. Buffett inherently (based on his style and risk profile) has a larger proportion of these.

[kragen]

> But don't you have to consider the number of times Buffett exercised his investment decision, and not only when he's put money up?

You might think so, but as it turns out, no. Try simulating it.