Efficient Markets

Thought this answer from Buffett was spot on. Question starts at 34:25 into the video. https://youtu.be/f4kOrk6c7T0

Host: You don’t subscribe to the efficient market theory? (That says basically you can’t beat the stock market.)

Buffett: Well if I believed that theory I’d still be delivering papers. No, I don’t think there’s any question that certain people who evaluate stocks as businesses can make intelligent decisions about business which will enable them to do very well in the securities market, but I don’t think somebody that is listening to a TV channel tell them what to do, or somebody jumping around with histrionics, or even some salesperson who is getting paid more money for selling them something and then getting them to change tomorrow is the key to it.

This is following up to his advice that 99% of people should just buy index funds. I think it’s a pretty great explanation of why that is so true. What I think he’s really saying is: Look, reading an article in Forbes or Barron’s, or following a pick from a newsletter, or doing what Jim Cramer says isn’t going to get you very far. You need to be able to sift through all this noise and evaluate companies and their stock for yourself. And chances are, you’re not really willing to do all the work.

That’s why I’m so glad I’ve found these discussion boards – this one most of all. It’s inspired me to actually do the work, and I now have like-minded friends who can potentially point out to me if/when I am missing something about a company we discuss.

You are all an incredible resource. Here’s to inefficient markets!



You don’t subscribe to the efficient market theory?

No one asked me but, no, I don’t. Here is why. Theories are simplified models of the universe. The efficient market theory (EMT) holds that 1) investors are rational and somehow they therefore have the same incentives and modes of action, and 2) that there is perfect flow of information, everybody knows all the news. As a consequence everything is already priced into the stock.

All you have to do is read the various BOFI threads of the last few days to know that that is bunk! If the two underying assumptions of EMT were true then someone would start a BOFI thread and all others would nod their heads in agreement. Cleary we don’t.

Denny Schlesinger