Saturday, May 2, 2009

Buffett on high finance

Once again, Buffett's raising eyebrows amongst the quants!

OMAHA, Neb. — A theme that keeps cropping up from Warren Buffett and Charlie Munger at the Berskire Hathaway meeting is their complete disdain for modern portfolio theory and the use of higher-order mathematics in finance.

Mr. Buffett talked about efficient-market hypothesis. EMH is a key part of modern portfolio theory. Broadly the theory is about how math shows that investors should diversify because it reduces risk. EMH says you can’t beat the broader market because it’s always perfectly priced.

  • “There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.”
  • “The more symbols they could work into their writing the more they were revered.”
  • “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”
  • “There’s this holy writ, the efficient market theory. How do you teach your students everything is priced properly? What do you do for the rest of the hour?”
  • “Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you but it doesn’t. They teach that in business schools because, well, they’ve got to do something. ”

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