Dien, as a fan of Mr. Buffet.. and reader of several books on him I thoroughly enjoyed reading your post.. Thanks, Josh Hinds :-)

> As a youngster, Warren Buffett was always
> interested in how to make money.

> When he was a teenager, he bought some
> pinball machines. He figured that a good
> place to put these pinball machines was in
> barber shops, since kids who were waiting
> around for a haircut could play some pinball
> while they waited. He came to an equitable
> arrangement with the barbers -- they split
> the profits evenly. Every week, all he had
> to do was go around to his various pinball
> machines and collect his money.

> As he became a young man with a wife and
> started a family, he wanted to find security
> for his family, so his urge to become
> wealthy increased. He had studied finance
> under a man named Benjamin Graham. Graham
> had written the classic textbook
> "Security Analysis," where he
> explained a whole new way of evaluating
> stocks based on identifying and buying
> undervalued stocks.

> The problem with this was that Graham's
> method blatantly said that the stock market
> was not an "efficient market."
> This flew in the face of the theories of the
> economists of his day, and of today's
> economists too. It led to a fierce
> intellectual conflict between these two
> schools of thought.

> Warren Buffett stepped into this maelstrom.
> To this day he believes that the
> "efficient market hypothesis" is
> wrong -- that is, you can find exceptions
> where the market is NOT efficient. It is
> WHERE the theory is wrong that Warren Buffet
> has made all his money.

> What is the efficient market hypothesis? It
> assumes that the stock market is an
> "efficient market" where there's
> perfect knowledge of what's going on, and
> that knowledge is applied in a purely
> rational way. So any new information should
> immediately be factored into the stock
> price.

> The efficient market hypothesis says that if
> a stock is trading at $252 per share, it
> really is WORTH $252 a share at that time.
> However, if a few months later it only
> trades at $6 a share, then at that later
> time it is really WORTH $6 a share --
> EVEN IF THE FUNDAMENTAL ASPECTS OF THE
> BUSINESS HAVE NOT CHANGED .

> Warren Buffett's criticisms of the
> "efficient market hypothesis" is
> that people are not fully logical creatures,
> but they are in fact highly emotional.
> People do NOT make unemotional calculations
> of stock prices, but they are in general
> highly affected by the daily EMOTIONAL
> effects of the behavior of others in the
> stock market. If everyone else is buying,
> people feel more secure to buy as well. But
> if everyone else is selling, people also
> have a tendency to want to sell. This is an
> emotional reaction -- not one always based
> on logic.

> By using this knowledge, Warren Buffett was
> able to bring a purely logical approach to
> stock market investing, which takes
> advantage of the emotional behavior of most
> others in the stock market. When the stock
> prices go too low (due to emotional
> reasons), Buffett will buy. Then, when they
> shoot up too high (again due to emotional
> reasons), Buffett will sell. Using this
> technique, he has almost always made money.

> What's happened to this conflict today? The
> efficient market hypothesis is still
> dominant among financial and economic
> circles. Yet, on the other hand, Buffett is
> (at present valuation) the second richest
> person in the USA (behind Bill Gates). As
> long as the efficient market hypothesis
> still dominates thinking in financial
> circles, you can make a LOT of money using
> Warren Buffett's stock market investing
> techniques.

> - Dien Rice




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