Berkshire Hathaway
In Reply To:
Efficient Market Theory

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By Goofyhoofy
August 26, 2002

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I'm having a little bit of trouble with your "efficient market" theory.

The reason is because I just went back and checked a chart for the past year and found that BRK.A handily outpaced the S&P 500 index for the period. (I'm going on faith that there is a "connect" between Berkshire (the stock) and Berkshire (the company).)

And yet a year ago, did the market not "know" about Warren Buffett? Had they never heard of Charlie Munger?

Now if I go back and look at two years ago, I find that BRK.A also outpaced the index for that 12 months period. So I have to ask, was Berkshire Hathaway a secret then? Did the market just start being "efficient" yesterday, and all this terrific information just become available?

If I could play pretend and put us all back exactly two years ago, couldn't you make your exact argument then? And yet the outcome, as we can testify from today's reality, is different than what you would have been predicting at the time.

Now I go back and look at three years ago, and I find just the opposite to be true, that is, the index outpaced BRK.A, and handily, if I do say so. Were Bloomberg terminals not available to the trading houses way back then? Was there not an incredible amount of information about Berkshire at the time? I'm fairly certain I can look back on this very board and find people analyzing the various moves of the company management. Why was it not efficient then, but you think it is now?

And suppose I repeated this exercise for four years ago and five years ago and six years ago and so on, always looking at the succeeding 12 month period. When is it that "efficient information" suddenly became available, or has it always been? And if it has always been, why the divergence, ever?

And if it has not, why not? I have had an Internet connection for nearly a decade, I have had an online account since 1996 or so. Bloomberg has been putting terminals on desks since the 1980's, there have been analysts since forever, ValueLine has been in business since 1931.

I think you might consider the possibility that the market is not perfect, it is not efficient, that it makes grotesque errors of judgment (I should think the one-upon-a-time marketcap of might be illustrative), and that it will continue to do so forever.

Therefore rather than trying to figure out what other investors know, and how to beat them, you might more fully concentrate on businesses and management and what will make a successful company go forward, which inevitably will mean a successful investment, often over the short run, but always over the long haul.

Just a theory. I think it has a better shot of being close to the truth, rather than yours, a portion of which posits that pronouncements by Jack Grubman - which clearly used to move the markets - had something to do with "efficiency" and "information" and "rational pricing."

I'll concede that your point is fair - if you think that investors have become "irrationally exuberant" over Berkshire's prospects, or they have swooned for Warren, or whatever and have bid the price up to expectations which cannot be met. But that has nothing to do with "efficient market theory", indeed, just the opposite, an illustration of which we all lived through between 1998 - 2000 in the technology sector.

That's because the information was wrong. Here's a tip: it always is.

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