From 1957-1969, Warren Buffett’s partnership returned 2800%, or 29.5% a year*. Over the same time, the S&P 500 rose 153%, or 7.4% a year. Warren Buffett has been crushing the market for seven decades, but his early success went largely unnoticed. His name didn’t appear anywhere noteworthy until Adam Smith’s Supermoney, which wasn’t written until 1972. While his name gained traction in the investment community, it took many years before it became what it is today. Buffett is synonymous with investing, and If you type his name in the Amazon search bar, the machine spits back 1822 book results. His rise to ubiquity can be traced back to 1984, when he destroyed an efficient market hypothesizer.
On the 50th anniversary of Security Analysis, Buffett wrote an article in the Columbia Business School Magazine called The Superinvestors of Graham-and-Doddsville . A few weeks prior, Buffett faced off against Michael Jensen, a professor from the University of Rochester and the school of efficient markets. In the speech, which was translated into the article, Buffett told a story that would remove any doubt that value investors outperformance should be attributed to skill rather than luck. Imagine that 225 million Americans all flipped a coin. If you landed on heads, you lived to flip another coin. If this was repeated twenty times, 215 people would be expected to remain.
But then some business school professor would probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same…I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were onto something. So You would probably go out and ask the zoo keeper about what he’s feeding them….A disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could be called Graham-and-Doddsville.
From 1926 until the time that Buffett wrote this article, the Fama French U.S. Large Value Index, which did not exist until the early 90s, crushed the S&P 500. But you can see that until 1970, the red and black line were neck and neck. So all of the outperformance over this 58 year period came in the 14 years leading up to Buffett’s coin-flipping speech.
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