The Superinvestors of Graham-and-Doddsville is a seminal essay by Warren Buffett.
Buffett begins this essay by imagining a nationwide coin-flipping contest. Everyone in the US participates and calls the flip of a coin. Call correctly and move on to the next round, guess wrong and you’re out.After 20 days, about 215 lucky flippers will have correctly called 20 consecutive flips. They gloat about their success, yet the nature of coin-flipping tells us they’re just lucky. It’s a game of random chance.
But what if all 215 flippers lived in the same town? What if they all hailed from the same school? The same fraternity? Then we’d get excited. The laws of probability suggest 215 winners after 20 days. But those same laws tell us that if all 215 belonged to an associated group, that almost certainly wouldn’t be the product of random chance. These 215 flippers clearly would know something we don’t.
The real flippers in Buffett speech are nine “superinvestors” — himself included. All nine crushed the market averages over multiyear periods by between 8% and 22% per year.In a world with millions of investors, such returns can occur by sheer luck — just like the 215 coin-flippers appeared at first glance. But all nine superinvestors hailed from the investment school of Benjamin Graham and David Dodd — Columbia professors now known as the fathers of value investing. That meant something big. It meant that their success wasn’t the product of luck. It almost had to be attributable to the only common link they shared: the investing philosophy learned from Graham and Dodd. The “intellectual origin,” as Buffett put it. Read more of this post