Warren Buffett & Charlie Munger: Efficient Market Theory

Warren Buffett and Charlie Munger discuss the efficient market theory and its popularity at universities. From the 1998 Berkshire Hathaway annual meeting.

Top ten investment books;

(The above are affiliate links.)

[frxk]

Nobody: "Mr. Buffet, are financial markets efficient?"

Buffet: "Yes, Earth is flat"

Rekt

[theYoutubeHandle]

the efficient market theory is correct in that if everyone invests like warrent buffett, then no one can out perform the market. Even warrent buffett would not get good returns if everyone invests same as him.

[chesterchambers]

A test of market efficiency can only be done using a model that explains what a stock price should be. That model is always incomplete. The CAPM model in place when Buffett started has been shown to be in need of extension. Once those extensions were made it became clear that Buffett did not violate the efficiency market hypothesis. The model we were using to say what prices "should be" needed revision. This is still true today and will always be true. The market is very close to efficient and the vase majority of those that invest otherwise underperform. Of course that doesn't mean you can't make money by convincing people that you are smarter than everyone else. Have fun.

[warrenking]

Charlie munger’s shoulder pads are trading at a very high multiple in this video. Expect a market correction in the near future.

[qlwsuzd]

This is so simple and such a common sense, why don't people, school and these funds get it...

[ArchitD.]

If you hear correctly, the question was how can we find a mentor in these near-efficient markets, but Warren Buffett answered him the theory, changing the subjects and now answering it completely. I may be wrong but can someone explain to me about this ?

[sgao]

Even if it's an efficient market, I can still outperform the market, because without me finding the inefficiencies, the market will not be efficient.

[nikhilgoyal]

6 sigmas of luck to 6 sigmas of skill, rofl !

[acetheboss]

The fact completely ignored by the efficient market hypothesis is the role of traders vs investors. Traders make decisions based off of resistance levels, patterns, and candlesticks. They don't go in with a margin of safety in mind. The efficient market hypothesis implies that information determines a stock price, and emotions play a role only in relationship to investors belief of a true prices. In reality the market is the aggregate of the emotions of people. IRRATIONAL EMOTIONS CREATE INEFFICIENCIES. Without somebody to correct inefficiencies the market is not efficient, therefore the same way that the actions of all investors makes a stock efficient, the same can be said to the contrary the actions of all investors makes the market inefficient, hence, there is a group of people correcting the inefficiency

[manasmundada]

What is the name of course at University of Florida ?

[gycyosg]

Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.

[michaelsmith]

The audio cut out when he was talking about Columbus... it sounds like he way starting to say Columbus was an anomaly and I'm not sure where he was going with that. But the talk of shippers who believe the Earth is flat... everyone knew the Earth wasn't flat in Columbus' day, in fact Columbus was wrong - he thought the world was smaller than was commonly accepted and that therefore he could take a short cut to India. He defintely had luck - If the Americas hadn't been there his crew would have either mutinied or died (my understanding is that they were within about a day of doing so when they spotted land).

[vuufke]

truly the best response to emh I've heard

[allankip]

The contamination is still there especially with Instagram now

[MrCementer]

Is this why Buffett are telling everyone to buy index funds? Less competitors?

[Pieter]

If these two are not an anomaly, then why aren’t there more?

[Fingolfin]

The irony is that Buffett himself has a huge ego and is held up in finance, even though he's accusing academics in finance of that. They call him the Oracle of Omaha for a reason. He likes being on magazine covers. You can tell it gets to him when he starts to attack the academics. Munger's body language shows his own contempt, too. You can't argue with the science and the empirical evidence, and that's the bottom line. Outliers are part of the distribution and are normal. Smart money is part of the distribution and helps create efficient markets - it's part of the framework. The second irony is that people look to Buffett for investing and stock picking advice, even though he says here the average person looks up to and listens to the PhD in economics or finance. Laugh. Unless you're taking this stuff in college and are fortunate enough to have a professor who covers it, you're never going to hear anything about efficient markets. I'm talking about the vast majority of Americans. Less than 50% of the U.S. population has a college degree, and only a small fraction of those graduates have a degree in a field where this subject matter is talked about (economics, finance, investing, and/or business). Of that subset, only a percentage of them will have covered this specific topic and have remembered it. People working and saving/investing for their retirement. They have no idea due to how the financial industry pushes product. In reality, the average laymen looks to Buffett and ignores the sound advice of the academics. For the average investor, using an investing strategy that holds to efficient market theory is an exceptional strategy that will maximize yields at the expense of the industry. Even for the advanced investor it's the winning strategy. The problem is that people think they're smarter than they actually are. Buffett admits this himself by saying he'd rather be lucky than skilled. In reality, very few are. Very, very few, and even then it's more about volume and other tools that most investors don't have.

[gycyosg]

Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.