The investing success of value investors of all kind would not be possible if the premise of his book, the efficient-market hypothesis, was correct. Warren Buffett's track record is a repudiation of it.
Not necessarily. Warren Buffett's track record is helped by two major factors.
The first is that, being Warren Buffett, he gets opportunities that regular investors don't. For instance look at the 2008 sweetheart deal he got on Goldman Sachs. Any smart investor would have leaped at it, but the value to them of saying, "Warren Buffett believes in us" was why he was offered the deal instead of someone else.
The second is that Warren Buffett is a big fan of buying and holding companies. Which leaves him in charge. By all accounts from the CEOs who continue to work for him, he is a phenomenal manager. Therefore the fact of his investing creates long-term improved returns.
When you move away from Warren Buffett, who else has been able to demonstrate long-term returns above what mere chance says is likely for someone to achieve by luck? In one study that I saw, there was only one other, Peter Lynch. The odds that someone anywhere in the mutual fund industry would match him by chance were under 5%. So there you have evidence that it is possible to beat the market for the right person.
But what advice does Peter Lynch himself give investors these days? If you want to invest in the stock market, buy and hold an indexed mutual fund!
Nobody seriously believes that the efficient market hypothesis is literally true. However your odds of being able to identify and exploit such inefficiencies in the broader market are sufficiently low that you are best off acting as if it is.
Anyone ascribing to efficient market hypothesis doesn't watch the market very much. Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis.
Regarding Buffett, he doesn't take over everything. He buys and sells a lot of stock where he doesn't take control, and he does very well doing that as well. Also, he's being doing it for a long long time. This isn't simply flipping 20 heads in a row when you've been doing it for 60+ years
Anyone ascribing to efficient market hypothesis doesn't watch the market very much.
Considering that the efficient market hypothesis came out of academics studying the market, and has been tested in many ways, your hypothesis is somewhat suspect.
Was Apple really worth several hundred billion more last year than it is now? Either it was extremely overvalued then, or it was extremely undervalued at < 400. Or both. There is nothing efficient about the market. It is volatile and driven very much by emotion on a day to day basis.
It appears that you do not actually understand the hypothesis that you reject out of hand. The hypothesis is not that the market knows the true value of the company, it does not. It is that the best available information on what the price of the company should be is already integrated into the current company price.
As information shifts just slightly about likely long-term prospects, the best estimate of its price can move a lot. This is not news. Nor is the fact that unavailable future information will change the price. Nor is volatility.
Now if you disbelieve the efficient market hypothesis, then fine. However any inefficiency that you discover, once it becomes known, will naturally stop working. I've seen this happen with several that I knew about. Over time the efficient market hypothesis tends to work better and better.
>It is that the best available information on what the price of the company should be is already integrated into the current company price.
My point is that there hasn't been any news in the last year big enough to warrant a several hundred billion dollar swing. There simply hasn't been. Just changing emotions.
The theory under which Apple justifies an insane valuation is the one where they continue a constant stream of innovation, defining new products, keeping everyone else guessing.
The simple fact that in the last year Apple has not delivered evidence that they can continue to do that should justifiably weaken belief in that theory. Which means that our best estimate of its future returns is far worse than this optimistic scenario. Which means that we should give less weight to that possibility, and therefore our best estimate of Apple's correct price is less than it was.
Because of this where you see evidence that the market is not pricing efficiently, I see evidence that you are not as smart as the market about finding what price signals to pay attention to.
>The theory under which Apple justifies an insane valuation...
Let's stop there. They have a PE of 7 ex cash. At the top, they had a PE of about 15. Amazon has an insane valuation. Apple does not, and they didn't at the peak. It was merely higher than it is now.
There are many investors who have outperformed over long periods of time, they just aren't household names (Seth Klarman is one).
What you ascribe to Buffett's success only came late in his career, those opportunities weren't possible when he was running a hedge fund and the early days of Berkshire.
Early in Buffett's career he had the advantage of believing in value investing before that idea was widely accepted in the broader market. It is easier to make a profit in an inefficient market than an efficient one.
The inefficiencies that he was exploiting are generally harder to find these days. But today he has other ways to make money.
This is not to say that he is not an extraordinary investor - he is. However he's benefited from many advantages beyond just raw investment talent. And as a practical matter, any investor who thinks that they can easily replicate his success is likely to fail.
I don't think the (strong) version of the efficient-market hypothesis is defensible but Warren Buffet's track record is not proof that it is wrong - in a random market, given a large number of investors, some will do well purely by chance.
Not necessarily refuting what you're saying, but here's an interesting take on "purely by chance" from Buffett, by analogy of coin flipping and getting a run of heads: http://www.tilsonfunds.com/superinvestors.html
The first is that, being Warren Buffett, he gets opportunities that regular investors don't. For instance look at the 2008 sweetheart deal he got on Goldman Sachs. Any smart investor would have leaped at it, but the value to them of saying, "Warren Buffett believes in us" was why he was offered the deal instead of someone else.
The second is that Warren Buffett is a big fan of buying and holding companies. Which leaves him in charge. By all accounts from the CEOs who continue to work for him, he is a phenomenal manager. Therefore the fact of his investing creates long-term improved returns.
When you move away from Warren Buffett, who else has been able to demonstrate long-term returns above what mere chance says is likely for someone to achieve by luck? In one study that I saw, there was only one other, Peter Lynch. The odds that someone anywhere in the mutual fund industry would match him by chance were under 5%. So there you have evidence that it is possible to beat the market for the right person.
But what advice does Peter Lynch himself give investors these days? If you want to invest in the stock market, buy and hold an indexed mutual fund!
Nobody seriously believes that the efficient market hypothesis is literally true. However your odds of being able to identify and exploit such inefficiencies in the broader market are sufficiently low that you are best off acting as if it is.