From a recent Motley Fool “Post of the Day”:
“Warren Buffett once scoffed at the idea of efficient markets by saying that if they were efficient, he’d be a bum with a tin cup, or words to that effect.
“In his great treatise _Man, Economy, and State_, Murray N. Rothbard pointed out that entrepreneurs make profits not by being correct in their entrepreneurial undertakings in an absolute sense (remember, there’s no such thing as perfect information and even the best investors err), but by being more nearly correct than their less well-informed competitors.
“Buffett has spent at least half a century proving Rothbard’s point.”
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As reflected in the von Mises assertion that markets “tend toward” a stable state where there is no profit to be made, but never reach that point because the point is constantly moving.
Mr. Buffett simply ignores the value of his own research and talent. By applying his efforts to his chosen field, he has profitted.
I would say that is very efficient indeed! :^)
Thanks for the interesting article, Prof. Klein. I’m pleasantly surprised that individuals at the Motley Fool are at least somewhat familiar with Rothbard. I’m a subscriber to the Motley Fool mailing list, so I should be getting that article relatively soon, if not already. I though Buffet’s comment was hillarious: if market’s were truly efficient, he’d be a bum with a tin cup — efficient indeed! I wonder how familiar Buffet is with the work of Austrians like Mises and Rothbard.
There’s an interesting article on Warren Buffet’s father at FreeRepublic.com. Unfortunately, it is marred by an infantile title “Warren Buffet’s Daddy” and comments on the article were also largely infantile. Firstly, only two-year olds use the phrase “daddy”. Secondly, it’s particularly inappropriate, given that Warren Buffet is 70 or more years old. Thirdly, Howard Buffet deserves to be recognized on his own merits, not as his son’s father.
Now, for the link:
http://tinyurl.com/6mojy
What I find interesting is that there are at least three variations of the efficient markets hypothesis, and the only one that could possibly apply to someone like Warren Buffett (an insider of the highest order of magnitude) would be the so-called “strong” version, which not a single person has ever seriously suggested applies in the real world.
It would be like Buffett saying Bill Gates can’t possibly live in Washington because Buffett “proves” that rich people live in Nebraska.
From what I know, while admittedly not having reviewed Berkshire Hathaway’s portfolio lately, Buffett mostly purchases the stock of privately-held companies: Jenny Pruitt Realtors, Dairy Queen, US Liability Insurance Group, et al. One reason he does this is to avoid being a market-maker like Peter Lynch was becoming. If he dealt exclusively in shares of publicly-traded securities, the herd would just follow him, bidding up the prices until the returns were merely average. In a free market, the opportunities for arbitrage are quickly exploited. Simply stated, we all can’t be, and won’t be, Warren Buffett.
With literally millions of investors and securities brokers acting on information and analysis 24/7, the odds of any one investor or fund manager earning above-average returns are long. This is why the Wall Street Journal’s dartboard portfolio runs neck and neck with the funds picked to compete with it, which are themselves randomized by dropping the losers. When I see newsletters and hyperlinks screaming about the potential (always the potential) of 425% returns, I have to laugh. Anecdotally, it is said that very few people were able to capitalize on the infamous White Sox scandal of 1916, as the bookies revised the line to reflect where the smart money was going.
The strong version of EMT, that all information known and unknown is already reflected in stock prices, is easily refutable. If that were the case, we would not even be out our transaction costs.
The semi-strong version, that all public information is already reflected in current stock prices, is likewise refutable. There will always be some asymmetry of information. Nonetheless, all the warm fuzzy stories about little old ladies’ investment clubs (and actively managed mutual funds for that matter) that have beat the indexes usually fall apart under closer scrutiny.
The weak version, that published stock prices cannot predict future performance, is quite sound and completely consistent with Austrian economics.
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