Learn to invest with Buffett

Chapter 14

Chapter 2 Section 5 Take advantage of market inefficiency and beat the market
In the past 63 years, the investment return of the overall market has only been about 10%.This means that an initial investment of $1000 will result in $63 after 405000 years.But if the return on investment can be obtained at 20%, (this rate of return is the long-term investment performance of Berkshire and Buffett's teacher Graham's company), it can now become $9700.

No matter how many students they have misled, market efficiency theory continues to be listed as one of the important teaching materials in investment courses in major business management schools.

Of course, those investment experts who have been deceived have been of great help to us and other Graham followers after accepting the theory of market inefficiency.Because no matter in which competition, whether it is investment, mentality or physical fitness, if we encounter an opponent and are told that thinking and trying are futile, for us, we will have the advantage.

--Warren Buffett
Buffett once said: "If the market is always efficient, I would just wander around on the street with a tin can in my hand." According to the efficient market theory, unless by chance, almost no individual or group can achieve performance beyond the market.It is even less likely that any individual or group will sustain such extraordinary performance.However, investment masters such as Warren Buffett, Magellan fund manager Peter Lynch, and Graham, the father of value investing, have proved that it is possible to exceed market performance with their impressive performance, which is tantamount to a blow to the efficient market theory.Efficient market theory has been greatly challenged. A large number of empirical studies have shown that the stock market is not always able to form an equilibrium expected return as claimed by the efficient market hypothesis. In fact, the market is often ineffective.

Regarding the inefficiency of the market, there is such a short story: two economics professors who believe in efficient market theory were walking at the University of Chicago, and suddenly saw a $10 bill in front of them, and one of the professors was about to pick it up. Another stopped him and said, "Don't bother, if it's really 10 dollars, someone picked it up long ago, why is it still there?" Just as they were arguing, a beggar rushed over to pick it up. He ran to the nearby McDonald's and bought a big hamburger and a large glass of Coca-Cola. While eating, he watched the two professors who were still arguing.

Facts show that the efficient market theory is very flawed, because there are several reasons: First, investors cannot always be rational.According to efficient market theory, investors use all available information to set sane prices in the market.However, a large number of behavioral psychology studies have shown that investors do not have rational expectations; second, investors' analysis of information is incorrect.They are always relying on shortcuts to determine the stock price, rather than relying on the most basic method of reflecting the company's intrinsic value; third, the performance measurement lever emphasizes short-term performance, which makes it impossible to beat the market in the long run.

Investment motto:

It is precisely because of the above reasons that investment masters such as Buffett, Fisher, and Lynch warn ordinary investors with their years of investment experience to get out of the misunderstanding of the efficient market theory, correctly understand the inefficiency of the market, and return to the value investment strategy.Only in this way can we avoid market risks and continue to beat the market for a long time.

(End of this chapter)