Warren Buffett on Efficient Market Theory

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“I’d be a bum on the street with a tin cup if the markets were always efficient” – Warren Buffett

Warren Buffett succinctly and perfectly sums up what EMT is all about. I’m also a non-believer of this theory because if the markets were so efficient, Warren Buffett wouldn’t be the 3rd richest man on this planet! If the markets were so efficient, why do booms and busts occur?

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6 thoughts on “Warren Buffett on Efficient Market Theory

  1. There is always a major risk in forming a very strong opinion when it comes to trading and investing.

    As I am a trader and an investor both at the same time.For my short term Forex and futures analysis,I am a believer of Efficient-Market Hypothesis.One has to accepts the prices that we see while trading and not get egoistic about a trading position.But when it comes to long term investing and specially value investing.It is all about finding an irrational price behavior and taking advantage of that condition in a systematic way.

    Technical analysis i.e study of charts,trends and indicators is based on Efficient-Market Hypothesis while Value investing is based an opposite premise.Both are widely accepted strategies of trading and investing.

  2. Hi FFN,

    “I’d be a bum on the street with a tin cup if the markets were always efficient”

    I think the keyword here is ‘always’. Market is fairly efficient, if it’s not, then the value investing assumption that share price will go back to an intrinsic value is rubbished. Isn’t value investing about betting on the price of a company eventually ‘waking’ up to its senses?

    So, Buffett is not wrong. Neither is the theory. I think the trick here is to figure out when the market is acting efficiently and when it’s not and to act or not to act accordingly.

  3. Hi, FFN,

    In layman’s term, it simply means there will be 2 times when the markets really go crazy. The Bear Markets, and the Bull/PIG Markets. These are the times, Sentiments overrule everything.

    My 22 years of in the market tell me I made less money by “trading” all the way from Bear Market to Bull market. I would have made more money(many times more) if I buy in Bear Markets and hold until and sell in Bull Markets. No need to reach the “PIG” Markets. If you know what I mean by the “PIG” Market.

    But alas, who can sit still and watch and do nothing?
    This most recent Bear/Bull market is the same.
    I do the same thing.
    Alamak!
    If you think I am talking about market timing, yes in a way.
    But I am already in the market for 22 years.

  4. only ideal markets are efficient. In third world countries, like here in China, we value investors are beating the market like shit. Winning the index by 20% per year is not rare at all. I believe in countries like USA which has more mature investors, the market will be more efficient, but still not ideally efficient.

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