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The Efficient Market Hypothesis (EMH) has long been a cornerstone theory in understanding stock market behavior. It posits that at any given moment, stock prices accurately reflect all available information about a company. This theory gained significant traction during the 1970s, buoyed by the rapid expansion of the Information Age, which revolutionized data storage and exchange.
In an era where even casual investors wield valuation tools that would have seemed like science fiction to traders of the past, one might assume that market efficiency has reached unprecedented levels. However, Warren Buffett challenges this notion, noting that the market is mostly efficient but not completely efficient.
Buffett contends that in some cases the market is far from efficient. Contrary to the belief that stock prices consistently reflect a company’s true value, Buffett argues that market inefficiencies are inherent. He asserts that stocks often become mispriced due to various factors.
Speaking at the 2012 Berkshire Hathaway Annual Meeting, Buffett referenced Benjamin Graham’s seminal work, “The Intelligent Investor.” In particular, he highlighted Chapter 8, which introduces the concept of “Mr. Market.” According to Graham, Mr. Market is an erratic and unpredictable figure, prone to irrational behavior akin to a “psychotic drunk.” Buffett emphasizes that investors should view Mr. Market as a partner rather than an advisor, seizing opportunities when prices deviate from intrinsic value.
In essence, Buffett’s perspective underscores the importance of recognizing and capitalizing on market fluctuations, leveraging them to make sound investment decisions, especially when stocks in rare instances sell at “silly prices.”
Despite advancements in technology and access to information, the market remains a realm where irrationality and opportunity coexist, shaping the dynamics of investing.
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© 2024 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.