Is Warren Buffett blind to tail risks/risks of ruin?

Discussion in 'Risk Management' started by Daal, Feb 1, 2017.

  1. Sig


    Or he grew and matured and realized that his personal wealth wasn't all important anymore and optimizing his tail risk avoidance wasn't the most important thing going on in his life. You can change your strategy based on a change in your outlook in life and you weren't by definition "wrong" either way. Happens to most of us as we get older.

    Also, it's very possible that he's far craftier than we give him credit for. The U.S. economy was in a tailspin and he had billions in Berkshire Hathaway and his foundation at risk. He is hands down the most respected money manager in the world. It means a great deal when he puts down all his money on the U.S., he actually has the ability to move markets with that kind of move by changing everyone's perception of how much confidence they should have in the U.S. economy at a time when there was a high level of irrational fear. Perhaps he was just signaling that the U.S. economy had his full faith and trust in the strongest possible way, in hopes that it would become a self-fulfilling prophecy of a sort for the entire economy. At the same time, that was a relatively minor investment given the giant tail of his other investments he was swinging with it.
    Last edited: Feb 2, 2017
    #41     Feb 2, 2017
  2. Daal


    Yes, its possible that it was part of the idea, to buy stocks and try to pump them to "create confidence". His GE and GS investments could also have been part of the "act". But still, those things are still 'benefits', one can keep adding benefits and still it doesn't warrant an 'all-in bet'. The fact that one needs to call the NYT in desperation to try to pump a market, shows that the win % is indeed NOT super high. There is a lot of uncertainty and risks involved. Either he made a "mistake" before 2008 or during/after
    #42     Feb 2, 2017
  3. Sig


    When the country you love and truly believe in is in the middle of a confidence crisis that could result in a financial meltdown that would result in a lasting depression and a huge amount of misery for millions, and you are one of the few people who could do something to stop it, is that just a 'benefit' and not worth doing because a formula says it isn't? Add to that the fact that you have billions in other funds that you could leverage by a relatively small (for him) show of confidence. At some point the real world intercedes here my friend. Some people do things for non-monetary reasons and would do the same again if given the chance. That's not a 'mistake', it's being a human. Not everyone lives via spreadsheets and formulas during extreme events, thank god!
    #43     Feb 2, 2017
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  4. Daal


    I understand, that's why I put mistake in quotes. Sometimes people might want to maximize wealth, sometimes utility, sometimes (perhaps) other people's (the country) wealth/prosperity. Those are all valid uses for money, but I do find extremely interesting how that 2008 piece, which is widely seen as a great money making call, likely had nothing to do with maximizing wealth because its a "mistake" in the math/kelly sense which actually minimizes wealth growth
    #44     Feb 2, 2017
  5. Maverick74


    Buffet is very close to the Fed and the government. He knew the bailouts were coming and he knew QE was coming. Remember the government approached him to bailout Bear Stearns and he passed but did invest heavily in Goldman. Based on what he knew, it was a slam dunk trade. At the very least, there would be enough bailout money and QE for him to bail out if he was wrong. It's not like the guy jumped into the abyss.
    Last edited: Feb 2, 2017
    #45     Feb 2, 2017
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  6. comagnum


    Buffet is no babe in the woods when it comes down to market panics and knows, as does many pro traders & savvy investors, there are certain times when the risk/reward is at extremes and you just have to get long and lean hard with size as the turn unfolds. When a president tells the public now is a good deal it is time to buy - it can be the ultimate buy signal. In the post 911 if you would have listened to Bush when he urged the public to get back into the market you would also have timed the bottom perfectly, making a killing in the proceeding months before the next bear down leg sent the market to new lows.

    Last edited: Feb 2, 2017
    #46     Feb 2, 2017
  7. jj90


    Daal, not everything is about reducing things to an equation. How did you make your outsized bet on EWZ and risk early last year? Did you actual follow a formula or did you simply say, this is ridiculous I'm putting 20% at risk.
    #47     Feb 2, 2017
  8. JackRab


    Why do you have to be consistent in your trading/investing? In trading I kinda get, if you're on a certain strategy that works... don't change it.

    But in (long term) investing, you certainly want to change with the tides a little bit. Especially when there's blood in the water and there are bargains. You cannot get the timing correct, but if not leveraged and are in it for the long term, you don't have to.

    Fuck man... if he really sold 10yrs+ index vols at 35... that's just a good trade...
    #48     Feb 2, 2017
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  9. newwurldmn


    You could take the 1250 worst spx days in the last 75 years and that doesn't even come up to 35 vol!
    #49     Feb 2, 2017
  10. Daal


    It was 15% and its far from being oversized. Oversized would be 30-40%+. 10-20% is actually quite standard
    #50     Feb 2, 2017