[DesertCat]

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I am hardly an expert on Buffet but I do know that we mere mortals trade shares of stocks, I know he is an investor, and I know there is a difference.


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Uh speak for yourself. I invest in the exact same manner as Buffett. I buy shares in undervalued businesses, as long as there is a catalyst that will bring their price to fair value. For me this approach has been good for a 42% annualized after-tax return over the last four and half years, and that includes one stinker of a year (2005 was only 13%).

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Finally, didn't Buffet himself recently recommend index fund for most investors?


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He recommended that YOU buy an index fund, i.e. anyone who's not willing to do the research and doesn't have the patience to be a value investor. That means index funds are the only best choice for most investors. But that has no bearing on whether Buffett and the other SuperInvestors serve as suitable proof that the efficient market theory is flawed.

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At the end of the day, the evidence that the return of a security is a reflection of the performance of it's asset class is something preached from Jim Cramer all the way down to the hallowed halls of Nobel Prize winning academics.

From there, it's an easy leap that what works best is a diversified portfolio of all asset classes. From there it's an easy leap that the best way to get proper diversification within each asset class is through index funds.

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Well Nobel Prize winning academics have horrible track records when it comes to actual investing. Remember Long Term Capital Management?

None of this explains Buffett's success. He's rarely had a diversified portfolio, he's put up to 44% of his portfolio in a single stock. He's rarely ventured out of buying common stocks and bonds. His recent dabbles in currencies and silver have had virtually no impact on his long term performance record.

His success has almost entirely been built on skillful stock picking, and usually in one single narrow asset class at a time. In the 50's he was deep in the small cap/pink sheet stocks. As his portfolio grew he started buying bigger market cap stocks and now he pretty much can only buy the largest of the large caps.

He's beaten the market 42 out of 48 years (and this ignores 5 winning years of the Buffett partnership that overlap with Berkshire Hathaway). His annualized returns in the Buffett Partnership were 29.5% over 12 years. His annualized returns at Berkshire Hathaway have been 21.9% over 40 years.

EMT can't explain Buffett as just "lucky" anymore (like they did in the 70s and early 80s) because it's too improbable to flip a coin 48 times and get heads 42 times. So Fama came up with the silly theory that Warren is a "businessman" not an investor, as if buying 100% of the shares of a company is somehow different than buying 1%. While Warren is great at resource allocation, he doesn't run any of the Berkshire companies. In almost all cases the original managers continue to run their businesses. But I doubt Fama put in the minimal research time on Warren to discern this well known fact.

Fama admits publicly that the market is not perfectly efficient. So why is it so hard to admit that some people are able to profit from those innefficiences, and relize that Warren is the best at it? No-one is arguing the market isn't usually efficient, just that it's occasionally inefficient. There is plenty of proof that if you are patient and work at it, you will find opportunities that provide outsize returns. The problem is, that most investment managers don't understand the true basis of investing (value), and even some that do are stuck in inefficient structures (mutual funds) that make it very difficult to beat the market.