Article on survivorship bias

[tombgrt]

"If you spend your life only learning from survivors, buying books about successful people and poring over the history of companies that shook the planet, your knowledge of the world will be strongly biased and enormously incomplete. As best I can tell, here is the trick: When looking for advice, you should look for what not to do, for what is missing as Phil Plait suggested, but don’t expect to find it among the quotes and biographical records of people whose signals rose above the noise. They may have no idea how or if they lucked up. What you can’t see, and what they can’t see, is that the successful tend to make it more probable that unlikely events will happen to them while trying to steer themselves into the positive side of randomness. They stick with it, remaining open to better opportunities that may require abandoning their current paths, and that’s something you can start doing right now without reading a single self-help proverb, maxim, or aphorism. Also, keep in mind that those who fail rarely get paid for advice on how not to fail, which is too bad because despite how it may seem, success boils down to serially avoiding catastrophic failure while routinely absorbing manageable damage."

 

 

http://youarenotsosmart.com/2013/05/23/survivorship-bias/

 

Good and highly relevant article on survivorship bias. Hope you guys like it as well.

[gary17]

thanks for sharing Tom - 

[racemize]

So, I guess we should look for value investors that haven't succeeded--anyone know of a good set to look at?

 

I presume leverage will be one of the downfalls...

[Guest hellsten]

Thanks.

 

So, I guess we should look for value investors that haven't succeeded--anyone know of a good set to look at?

 

I presume leverage will be one of the downfalls...

 

Yes. What was the name of the value investor who had a great 20-year or 30-year track record and then he destroyed his reputation during the financial crisis or just before?

 

I spend a lot of time on reading about investing and managing my investments when I could just outsource it, so it's something I hope doesn't happen to me when I'm close to retiring. All that time spent managing my investments wasted, if it happened…

 

Bruce Berkowitz and premature accumulation. Mohnish Pabrai and Sears:

 

One was Sears Holdings, which sits on real estate that's worth far more than the company's market cap, but can only be monetized by liquidating the business.  Despite a prominent theory which holds that people act only according to the cold calculus of economics, most CEO's are not hot on the idea of liquidating the firm they preside over (or perhaps this affirms the theory: after all, why dismantle the company that's paying you such an appealing salary?).  Either way, the alternative that's best for shareholders is not always the option that's pursued by management.

http://navinvesting.blogspot.com/2013/02/mohnish-pabrai-on-investing-mistakes.html

 

Mohnish Pabrai initiated holdings in Sears Holdings Corp. His purchase prices were between $102 and $142.36, with an estimated average price of $118.9.

http://www.gurufocus.com/news/22129/mohnish-pabrai-buys-sears-holdings-corp-and-pinnacle-airlines-corp-sells-stampscom-inc-compucredit-corp-berkshire-hathaway-inc-star-gas-partners-lp

 

The book Good to Great suffers from survivorship bias, as many other books on management and business. They did a lot of research for the book, years probably, but they still failed in a way…

[eclecticvalue]

Hellsten, I think the person you are talking about is Bill Miller.

 

If Good to Great suffers from suvivorship bias, what about Outsiders?

[Guest hellsten]

Hellsten, I think the person you are talking about is Bill Miller.

 

If Good to Great suffers from suvivorship bias, what about Outsiders?

 

Thanks. Bill Miller it is. His failure seems to have been caused by premature accumulation and failure to recognize how bad the crisis was. I remember looking at AIG in 2008 and thinking it is cheap, but I was too scared to invest in it at the time. I'm a happy owner now…

 

Regarding The Outsiders, I'm not sure but I guess there's survivorship bias to some degree. Would Henry Singleton be able to run Coca Cola as successfully as he did Teledyne?

 

There's maybe an even more important lesson in the blog's name "You are not so smart: A celebration in self delusion".

 

When I have delusions of grandeur — happens to everyone when one of their stocks is up 10% — I ask myself "If I competed against the Lance Armstrong of value investing what would the result be?". That's why I coattail and try to avoid complex investment theses with many variables.

 

It's also good to know history, and that the world of finance hasn't changed much since e.g. Long-Term Capital Management or the beginning of time. Self delusion is the norm in this business… That's why I also like behavioral investing, not just value investing…

[Uccmal]

Thanks Tom,

 

Isn't  it Munger who says Invert, always invert?  My wife and I were discussing the role of luck in success.  If you look at many of the recent Tech companies it is very hard to remove luck from the equation.  From MSFT to Twitter and all points in between. 

 

Isn't the reason we are value investors easily demonstrated by the fact that the vast majority of mutual funds perform worse than the S&P 500.  You need only look at what slightly below average does, not even spectacular failures.  By studying value investing and the statistics around it, we are endeavouring to reduce randomness from the situation, or if you like, turn luck in our favour. 

 

And of course, leverage goes both ways, but its nastiest cut is on the way down. 

 

 

[BarbellStrat]

So, I guess we should look for value investors that haven't succeeded--anyone know of a good set to look at?

 

I presume leverage will be one of the downfalls...

 

There's a book I read -- I believe Taleb recommends-- called 'What I learned losing a million dollars.'  It is a bit more trading oriented but nevertheless a worthwhile read. 

[tombgrt]

Hellsten, I think the person you are talking about is Bill Miller.

 

If Good to Great suffers from suvivorship bias, what about Outsiders?

 

They all suffer from it. Hell, Buffett and Munger suffer from it. Biases are generally not something you can unlearn. But you can probably get a strong understanding and insight in it, if you put in enough time and practice.  I guess you can at best temper the effect biases have on you.

 

Look at how we all look up to guys like Eric. Clearly he's very bright, talented and better in control of his emotions than most people. But in the end it's just a numbers game. Most of those that have fallen won't feel much for sharing how badly they have done. Even if they had a lot of great investments before they went bust.

[Packer16]

We will all lose at some point and I learn more from mistakes than successes.  That is why I really appreciate a guy like Tim McElvaine who has made some great calls but has shared some details on his losses and the reasons why.  You don't see that often and for me provides the greatest opportunity for learning.

 

Packer

[Hielko]

We will all lose at some point and I learn more from mistakes than successes.  That is why I really appreciate a guy like Tim McElvaine who has made some great calls but has shared some details on his losses and the reasons why.  You don't see that often and for me provides the greatest opportunity for learning.

 

Packer

Anything specific you can recommend from him? I see he has a lot of quarterly/annual reports online.

[Packer16]

Look at his annual presentations.  There is something in one of the more recent ones.

 

Packer

[giofranchi]

If Good to Great suffers from suvivorship bias, what about Outsiders?

 

I have read Mr. Kahneman, Mr. Klein, Mr. Thaler, Mr. Ariely, Mr. Burnham, Mrs. Dweck, Mr. Csikszentmihalyi, and others… And I liked them very much, and I think their work is great and very helpful! Yet, to overestimate their importance would be as much an error as to overlook them…

1) Allocation of capital (or resources in general) is the single most important thing in business,

2) There is a sound way to allocate capital (or resources in general), based on the priciples of value investing,

3) As in almost any other human endeavor, there are masters at allocating capital.

 

Gio

 

[constructive]

http://youarenotsosmart.com/2013/05/23/survivorship-bias/

 

This is interesting but we're only getting half the story.  What do the unsuccessful blogs about survivorship bias say?  :D

 

Speaking of learning from failures as well as successes, The Billion Dollar Mistake is a good read.