EFFICIENT MARKETS

“I’d be a bum on the street with a tin cup if the markets were always efficient.” Warren Buffett

"I really think that a lot of modern finance theory can only be described as disgusting." Charlie Munger

“It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.” Warren Buffett

"It is hard for me to see how anyone can consider the stock market efficient." Phil Fisher

“Despite the comfortable academic consensus of market efficiency, financial markets will never be efficient because markets are, and will always be, driven by human emotions: greed and fear.” Seth Klarman

"I have noticed that everyone who has ever told me the markets are efficient is poor." Larry Hite

“We believe the efficient market hypothesis is a bunch of crap.” Bernay Box

“Financial theorists build models on the basis that markets are rational and efficient. Many practitioners have been able to build fortunes out of the fact that they are not.” Paul Marshall

"No, no, no, no, no, no. No, I do not know most of that stuff [modern portfolio techniques] and do not understand it." Jim Rogers

“My experience makes it difficult for me to believe in the efficient market hypothesis.” Jean Marie Eviellard

“Value investors know – although efficient market believers fail to comprehend – that the underlying value of a security is distinguishable from its daily market price, which is set by the whim of buyers and sellers, as are the prices of rare art and other collectibles.” Seth Klarman

“I was never a believer that the markets are efficient.” David Einhorn

"A basic truth remains unchanged: Investor psychology undermines efficient stock markets." John Neff

“I have a name for people who went to the extreme efficient market theory- which is ‘bonkers’. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had a difficulty in that fundamental assumption did not tie properly to reality.” Charlie Munger

"With all due respect for academic proponents of efficient markets, in my experience markets are continuously foolish, thanks to investors, who, despite George Santanya's famous admonition, forget the past." John Neff

“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.” Warren Buffett

"Is there a Nobel Laureate in finance more highly regarded than the Oracle of Omaha? He makes a mockery out of Modern Portfolio Theory by simply proving its relative uselessness with his own results year after year." Frank Martin

“It’s surely time for those whose mental models are locked in Modern Portfolio Theory and Equilibrium Economics to cease viewing themselves as the essence of intellectual modernity and sophistication. A little modesty and much more reading might be in order.” James Anderson

"Efficient market theory holds that financial markets are efficient because investors are rational. They will immediately and accurately assess all available information and act on it, thereby rapidly reflecting it in the pricing of securities. Conceptually, this picture makes sense. In practice, it simply doesn't hold up." Seth Klarman

"Modern financial theory amounts to the belief that hard work, superior insight, and good judgement - the keys to success in the real economy - are ineffectual for the investor in public markets. It tells the investor: hard work and clear thinking doesn't help here, for now you are in a special place where the quaint rules of Main Street do not apply. Here all is mystery; your fate is controlled by forces you can never understand. "But", say the masters of the theory, "We understand. Follow us". Then one day it becomes clear that the masters do not understand, and panic reigns." Andy Redleaf

"Modern portfolio theory, it involves a type of dementia I just can’t even classify" Charlie Munger

“The efficient-market-believing professor takes a walk with a student. “Isn’t that a $10 bill lying on the ground” asks the student. “No, it can’t be a $10 bill,” answers the professor. “if it were, someone would have picked it up by now”. The professor walks away, and the student picks it up and has a beer.” Howard Marks

"For an astute investor, the worst situation is an “efficient market” for which prices accurately reflect the information. Not to worry – none of us will ever see that.” Leon Levy

"Markets aren't fully efficient because humans control its auction-driven pricing mechanism. Humans are subject to vacillating between extreme fear and extreme greed." Mohnish Pabrai

"Economic dogmas die hard despite evidence of failure. Think of all the unnecessary pain and misdirection from the idea of Rational Expectations and the Efficient Market Hypothesis." Jeremy Grantham

"Forget the shibboleth that stocks are going to give you a higher rate of return because they are more risky. That is not true." Michael Steinhardt

"Corporate finance is beneath contempt. Believing just by buying volatile stocks you make an extra 7 percentage points per annum, I mean those people still believe in the tooth fairy and yet it is taught to children." Charlie Munger

“Beta is deemed to be constant, regardless of price. Because MPT advocates believe that markets are largely efficient – ie the current price is an accurate reflection of the value of the business based on all available information – risk should not be price-related. Speaking of price, in other words, on March 10 2000 when priceline.com peaked at $162 per share, it was no more risky than its current price of $1.50. That’s where they lost us.” Frank Martin

“Some of the best early advice I got was to forget all I’d learned in business school about efficient markets and instead read Ben Graham. You either take to it or you don’t, and I knew right away that this was how I wanted to do it.” Prem Watsa

"In short, we believe market efficiency is a fine academic theory that is unlikely ever to bear meaningful resemblance to the real world of investing." Seth Klarman

“Modern Capital Theory is of little or no help to those involved primarily with making investment decisions – value investors, control investors, most distress investors, credit analysis, and first and second stage venture capital investors.” Marty Whitman

“Buffett and his later ego, Charlie Munger have characterized the widely practiced MPT as laughable.” Frank Martin

"[The Efficient Market] Hypothesis holds that financial prices reflect all of the information available to participants in the market. That has profound implications for investors. If it were true, there would be no bargains in the stock market since any price anomolies would be arbitraged away. In the real world, this is simply not true." Guy Spier

"A whole body of academic work formed the foundation upon which generations of students at the country’s major business schools were taught about Modern Portfolio Theory, Efficient Market Theory and Beta. In our humble opinion, this was a classic example of garbage in/garbage out. One could have just as easily manipulated the data to show that corporations with blue covers on their annual reports performed better than corporations with green covers on their annual reports." Christopher Browne

"Our universe is the approximately 1,900 companies listed on North American stock exchanges with market capitalisation between $1b and $25b. Within that range we've found no correlation between market cap and market efficiency. We actually don't consider the market very efficient, period." Andrew Benton

“Beta and modern portfolio theory and the like – none of it makes any sense to me.” Charlie Munger

"I don't know alphas, and betas, and all the efforts that the modern investor has made to create a new understanding of markets." Michael Steinhardt

"A well established academic doctrine argues that markets are efficient, meaning that the price of a stock fully incorporates all known information and judgement about that stock. A corollary to this Efficient Market Theory is that nobody can outperform the market over time. But everything I've seen in my years on Wall Street - and a lot of more current thinking on finance theory - says that that is simply not so." Robert Rubin

"I do not believe that prices are efficient for the diligent, knowledgeable, long-term investor." Phil Fisher

"Based on our daily success in Princeton Newport Partners, the question wasn't, "Is the market efficient?" but rather the appropriate questions were "How inefficient is the market?" and "How can we exploit the inefficiencies." Ed Thorp

“Risk defined as beta - the idea that something is more risky because it’s stock price has gone down and therefore it’s volatility might have increased flies in the face of the core tenets of Graham and Dodd who would say assuming a stable value, if the stock price is down, there’s less risk in it.” CT Fitzpatrick

“I don’t think Warren Buffett got to going from flipping newspapers to worth $75b if the market was totally efficient. Whether it’s Mario Gabelli, whether it’s Stan Druckenmiller or Lee Cooperman. Everyone seems to think it is hard to beat the S&P, if its so easy to underperform, the ability must exist to outperform. I think there are enough people that have outperformed over the years, to suggest with patience, some brains and a little bit of luck you can outperform. I’m committed to that proposition.” Leon Cooperman

"Notions of market efficiency - the idea that most assets are priced "right" - are based on belief in investor rationality and objectivity. But certainly those traits are little seen in real life." Howard Marks

"The academic world still insists on teaching that financial markets are largely efficient, with perhaps a few minor anomalies (such as the "January effect") that give tenure-seeking finance professors something to research." Seth Klarman

"The possibility that stock value in aggregate can become irrationally high is contrary to the hard-form “efficient market” theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experience.” Charlie Munger

“We vehemently disagree with the Modern Portfolio Theorists, who maintain markets are so efficient as to eliminate the likelihood of long-term outperformance. These academics only attribute consistent long-term superior performance to a fluky aberration.” Christopher Bloomstran

"The elegance of the efficient market theory is at odds with the reality of how the financial markets operate." Seth Klarman

"The facts are that the capital asset pricing model has clearly been rejected as an adequate description of the movement of stock prices. Beta, the only factor that was once thought to matter, does not appear to explain very much." Richard Thaler

"The thing about mathematical modelling is that in order to make problems tractable, you need to make assumptions. Assumptions then become axiomatic for the entire subject - not because they are true, but because they are necessary to get a solution. So, it is easier to assume efficient markets because without that assumption, you can't do the math. The problem is that markets aren't efficient, but that fact is just conveniently ignored." Colm O'Shea

"Academics are deliberately blind to the fifty-plus year track record of Warren Buffett as well as those of other accomplished investors, for if markets are efficient, how can Warren Buffet's astonishing success possibly be explained?" Seth Klarman

"Modern Portfolio Theory is the ultimate application of mathematics to what really is a soft science. So even though MPT is an important part of the CFA program and the curriculum in most graduate business schools, Buffett & I consider it almost laughable. Yet it continues as a core curriculum in most graduate business schools because that's what teachers have been taught to teach, and it's hard for this battleship to change direction." Frank Martin

“If there is no relationship between risk and reward either between assets classes or within equities then the Capital Asset Pricing Model (CAPM) and all its derivatives are complete hokum. As another fine research paper put it last year 'Is it ethical to teach the CAPM?' It plainly isn't. This won't have the faintest impact on the CFA Institute which will continue raking fees in and claiming the authority to determine who is qualified to be an investor for teaching - let's be frank- a bunch of lies that have little or no support in reality. They and others appear to believe that theory matters more than evidence in allocating trillions of investment dollars.” James Anderson

"Beta and modern portfolio theory and the like - none of it makes any sense to me. We're trying to buy businesses with sustainable competitive advantages at a low, or even, a fair price." Charlie Munger

"I believe that the efficient market hypothesis fails because it ignores human nature, particularly the nature of most individuals to be followers, not leaders. As followers, humans are prone to embrace that which has been faring well and to shun that which recently has been fairing poorly." Ed Wachnheim

"When I went to Stanford business school and I hadn't been an investor I had all these PHD's in finance that said the same thing .. the efficient market hypothesis - all the information is in the price. Instinctively I knew that was wrong, it just wasn't right. Why would everyone be of the same intelligence and of the same risk profile and same everything. And how could someone digest all that information too. Price is not the proper discounting of the future the way the efficient market hypothesis insists and applies." John Burbank

"Academia failed. The professors at our greatest universities have perfectly asinine ideas - first, about efficient market theory. One of those people influenced McKinsey [& Company] so much that McKinsey came to the Washington Post at the time it was selling at one-fifth of what it was plainly worth as a share of the total enterprise, and said, "You can't buy the stock in because, under efficient market theory, it can't be worth a fifth of what people would pay for the whole company. Of course, the kind of mind that would keep a stupid idea like this when they have a fact that would clearly refute it - it clearly violates traditions of science and mental decency. They taught this drivel to our children for decades and, by God, a lot of peopleare still doing it. It was in the major textbooks in economics and people as smart as Paul Samuelson believed it - and that is a significantly smart man…

How do smart people get such dumb ideas and hold them so long? Then these ideas from economics drifted into corporate finance, and they got the capital asset pricing model - also pure drivel. They taught it to all of our children and the law schools picked it up. They didn't understand it, but they could repeat it like a mantra from Buddhism, and people would learn it and regurgitate it on the examinations and they get A's and so forth. Of course, they got out into the real world and they were menaces to decency and sound thinking. That didnt bother the people at Harvard University or any of the people that were doing it. And you say, how can smart people do such immensely dumb things?" Charlie Munger

"Most of the assumptions behind the CAPM model do not come close to reality - at least not on this planet." David Dreman

"I also found it difficult to integrate the efficient-market hypothesis (that everything in the stock market is "known" and prices are always "rational" with the random-walk hypothesis (that the ups and downs of the market are irrational and entirely unpredictable). Already I'd seen enough odd fluctuations to doubt the rational part, and the success of the great Fidelity fund managers was hardly unpredictable. It also was obvious that Wharton professors who believed in quantum analysis and random walk weren't doing nearly as well as my new colleagues at Fidelity, so between theory and practice, I cast my lot with the practitioners. It's very hard to support the popular academic theory that the market is irrational when you know somebody who just made a twenty fold profit in Kentucky Fried Chicken, and furthermore who explained in advance why the stock was going to rise. My distrust of theorizers and prognosticators continues to the present day." Peter Lynch

“This world of deep uncertainty and tectonic shifts is radically opposed to what after 50 years of failure is still presented as ‘Modern Portfolio Theory’. Perturbingly this with its broader partner of equilibrium-based economics, still holds general academic and professional sway.” James Anderson

"A lot of MBA programs, particularly these days, teach you about market efficiency and accounting rules, but this is not a perfect world and there will always be anomalies and there is always "wriggle room" within company accounts so you have to stick to your guns and forget the hype." Peter Cundill

"This theory [Efficient Market Theory] is what they teach in business school so that you'll have less competition when doing your own stock research." Joel Greenblatt

"I'm not an efficient-market person. I think that there is a lot of misunderstood information. I think investors don't absorb all of the information. I don't think the market solves things." David Einhorn

"In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp, Buffett Partnership and Berkshire illustrate just how foolish EMT [Efficient Market Theory] is." Warren Buffett

“We most certainly ascribe no credence to the EMH or other academic insanities such as the Modern Portfolio Theory or its Capital Asset Pricing Model cousin.” Chris Bloomstran

"Markets are inherently inefficient and always will be because of human nature, because greed and fear, because of the herd instinct." Barton Biggs

"You can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools." Warren Buffett

"I am not a particularly big fan of the idea that markets are efficient. In fact I think people who believe this have never spent any time working in investment management. Everyone in the industry has seen how investment fads wash over the industry from time to time, only to wash out again as returns begin to disappoint." Russell Clark

"Till this day, the vast majority of individual investors and institutional investors still follow investment philosophies that are based on "bad theories." For example, they believe in the efficient market hypothesis, and therefore believe that the volatility of stock prices is equivalent to real risk, and they place a strong emphasis on volatility when they judge your performance." Li Lu

“To the aspiring young analyst, I can tell you that the answer to the question of the market’s efficiency or lack thereof is clear: The market is inefficient enough. “Enough for what?” you ask. Inefficient enough for me—and you—to find some great opportunities from time to time. Not every day or every week, but often enough.” David Abrams

“Modern financial theory tells you to calculate the beta of a stock to determine its riskiness. In my entire professional career, now twenty-five years long, I have never calculated a beta. This theory urges you to move your portfolio of holdings closer to the efficient frontier. I have never done so, nor would I know how. I have never calculated the alpha or beta of my firm’s investment performance, which is how some people would determine whether or not we have done a good job.” Seth Klarman

"All of modern portfolio theory and all the way most academics and many advisers and managers look at the world just seems kind of insane when you really boil it down to ownership shares of businesses that you’re trying to value." Joel Greenblatt

"We don’t say, 'Well, we don’t know what’s going to happen, so therefore we’ll discount it at 9 percent instead of 7 percent,' some number that we don’t even know. That is not our way to approach it. We feel that once it passes a threshold test of being something about which we feel quite certain, that the same discount factor tends to apply to everything. And we try to do only things about which we are quite certain when we buy into the businesses. So we think all the capital asset pricing model-type reasoning with different rates of risk-adjusted return and all that, we tend to think it is — well, we don’t tend to — we think it is nonsense." Warren Buffett

“Personally I lost any belief in the twin notions of predictability and efficiency on October 19, 1987. The S&P 500 losing 20 per cent of its value on no news at all seemed a little hard to rationalise away.” James Anderson

“Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to. I think you’d have to believe in the tooth fairy to believe that you could easily outperform the market by seven-percentage points per annum just by investing in high volatility stocks.” Charlie Munger

“Approaching my 25th year of learning about investing, many things continue to surprise me. Chief among them is the resilience of the capital asset pricing model (CAPM), the accepted formula for calculating risk versus return. It remains a fulcrum of the Chartered Financial Analyst Institute and other qualifications bodies and underpins the methodology often used to determine value. Such longevity is astonishing given the model’s lack of intellectual rigour. Despite representing another spectacular failure of the dismal science, CAPM has come to dominate modern portfolio theory.” Mark Urquart

“We want to diverge from the benchmarks. Positively, of course. We don’t believe in tracking error. In fact, we regard it as a waste of time.” Terry Smith

“Professor Hendrik Bessembinder notes that a mere 1 per cent of companies accounted for all of the global net wealth creation. The other 99 per cent of companies were, it turns out, a distraction to the task of making money for clients. The capital asset price model (CAPM) so beloved by the financial industry is therefore nonsense because the normal distribution of stock returns that underpins it is imaginary.” Lawrence Burns