The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don’t always accurately reflect your weight, the markets don’t always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good.
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The tools that get investors and speculators in and out of the market only after some widely followed average has turned must obviously exaggerate the movements of the market.
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The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it.
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Quotations fluctuate constantly, reacting often illogically to all sorts of temporary and even trivial influences.
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When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.
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Market inefficiencies, like tax selling and window dressing, also create mindless selling, as can the deletion of a stock from an index. These causes of mispricing are deep-rooted in human behavior and market structure, unlikely to be extinguished anytime soon.
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Stock market efficiency is an elegant hypothesis that bears quite limited resemblance to the real world.
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I’ve often said that the efficient market hypothesis, or EMH, has a lot of truth to it, but the CMH — or “cost matters hypothesis” — is eternally truthful to the last penny.
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There’s no asset so good that it can’t be overpriced and become a bad investment, and very few assets are so bad they can’t be underpriced and be a good investment.
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I believe the market accurately reflects not the truth, which is what the efficient market hypothesis says, but it accurately and efficiently reflects everybody’s opinion as to what’s true.
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Economist picture a thousand buyers and sellers congregating in the market place to match their keen wits and finally evolve the correct price for each commodity. In the securities market particularly, the word of the ticker is accepted as law, so that one often thinks of prices as determining values, instead of vice-versa.
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To establish the right price for a stock the market must have adequate information, but it by no means follows that if the market has this information it will thereupon establish the right price.
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I don’t see how you can say that the prices made in Wall Street are the right prices in any intelligent definition of what right prices would be.
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I deny emphatically that because the market has all the information it needs to establish a correct price the prices it actually registers are in fact correct.
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There is evidence that the stock market is more efficient in processing information about what other investors are doing than it is in processing fundamental information about the underlying assets, which is why stock prices so often turn out with hindsight to have been crazy rather than rational.
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