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Berkshire Hathaway
EMT - Buffett's Comments in 1988 Annual Report

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By Jaldersonjr
May 15, 2001

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From PhoolishPhilip's post: If a Graham and Buffett value approach to investing does consistently produce market beating results, then why are there not more examples of this approach? Why hasn't every investor adopted this approach?

First, an aside: Buffett started out about 100% Graham. Today he is as much Philip Fisher as Ben Graham. He seems to talk more about Graham because he was directly his student and because he considers Graham to have been the one who started him on the right course of action.

Back to the point. Efficient Market Theory (EMT) was invented in academia, and recently. Further, it addresses something Buffett does not, namely, "the market." It cannot be overemphasized that what Buffett does has nothing to do with the market as a whole. To him it's just a bazaar where you can see what the price is today. Buffett does companies. Academia does markets.

Why isn't Graham taught today? While Ben Graham taught (Columbia), probably he was not seen as a true academic. You have to hang around a university faculty a while to understand that those whose whole professional life is academic look down their noses at practitioners. Someone with a Ph.D. in, say, electrical engineering who had a career at maybe GE, retired and taught electrical engineering at a university would not be considered a "real" academic. So Graham may well to this day not be considered an academic and therefore his teachings not truly academic and thus not worthy of being taught by real academic intellectuals.

As seen on the PBS NOVA show on LTCM the Buffetts are explained by academics as saying that if you flip a coin a thousand times there will be streaks of seemingly too-long series of heads-after-heads tosses (and tails-after-tails). But that is not the intent of and is not based on the skill of the coin tosser, it's just the way things go; things get streaky now and then. So Buffett's success has nothing to do with skill; there will always be a few who luckily stepped into the game and bet heads at the start of a streak.

Most investors learn what they know about investing from brokers and analysts who write books. The goal of those people is to make commissions. Long term buy and hold is not healthy for commissions. The goals of a Buffett-type investor and a broker/analyst are not in sync by a long ways.

Brokers aren't big on analysis. Their day is filled with selling activity, not doing research. They follow their company's analysts. Those analysts learned in academia where EMT is taught. If they truly believe in EMT one wonders why they bother analyzing anyway. Further, as pointed out in the recent "Fortune" article, analysts seem really to have the job of providing supposedly analytical justification to the banking side's "deals;" hardly objective work.

Some Buffett quotes (From Warren Buffett Speaks by Janet Lowe, John Wiley & Sons, 1997):

� I'd be a bum on the street with a tin cup if the market were always efficient. (My note: Buffett does not say the market is not efficient but only that it is not nearly as efficient as the EMT folks say and that difference is enough to make plenty of money.)

� Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards.

� It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn't do any good to think.

� Current finance classes can help you do average.

� I have seen no trend toward value investing in the 35 years I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult.


From other sources, such as Hagstrom's The Warren Buffett Way, we learn that Buffett believes the general bent of people in their investing is toward lots of action. He describes his own level of buying and selling activity as appearing slothful by comparison. The picture that comes to my mind is that Buffett is 95% study and 5% action and that most of those buying and selling stocks are closer to the other way around whether professional or amateur.

There just seems to be this almost irresistible urge that almost all of us get that goes, "The market is going up - DO something!" and "The market is going down - DO something!" The something done mostly earns someone a commission. If the herd is moving, much as we like to think we are rugged individuals, we will usually resist moving with the herd only so long, then we will decide the herd must be right after all.

I do not sense that Buffett has such urges. He's driven them out of his brain. If the numbers aren't there, neither is the action.

So in summary, my thinking on "Why not?" is:

1. Graham, Dodd and Fisher were not academics and therefore their teachings were not academic and therefore will not be taught by academics.
2. Long term buy and hold is not to the benefit of those who place our orders so there will be no motivation passed along to us from those with whom we place our orders to do LTBH.
3. People tend to have a very, very strong bias toward action, as in Do Something! It is contrary to our nature to be doing extensive research while "out there" there is the big flurry of activity. We can't stand not to be out there in the action.

Jay