[DesertCat]

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"When Buffett was done reading PetroChina's annual report for the first time in 2003, and before he knew their stock price, he said anyone could who read that report could see that PetroChina was worth more than $100B. When he found out it's market cap was $37B, he didn't revise his estimate, he bought with both hands as fast as he could."

He did revise his estimate. Or perhaps this was an very rare exception and he didn't. But the fact that "he bought with both hands" says nothing about whether he revised his estimate. And I would be extremely shocked if Buffet wouldn't fully agree with my stance.

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David, Buffett disagrees with you. It doesn't make you wrong, but clearly he doesn't think the same way you do. I've read almost everything he's written or said, and he's very clear about his philosophy. He doesn't incorporate market prices into his valuation estimates. He is looking for situations where the market is wrong, so why would he listen to it's opinion? He's actually said once he's established his positions he would not care if the market was open only once a year, or even every five years. He buys many private businesses, his approach has no need for public stock quotes.

In the PetroChina case he described clearly what he does. Never did he mention using the price to validate his estimate. For you to be right, you must assume that Buffett lies about his methods. The problems with that is

a) Buffett shares his methods freely, even though he isn't required to. If he were lying about his methods (to throw off the competition?) he could just tell people he uses astrology.
b) Even if Buffett was lying about his techniques, they've been documented by his teacher, Ben Graham, in several books that are taught in CFA courses as FA bibles much as TOP is a poker bible. They are responsible for dozens of other top value investors of outstanding accomplishments who credit those accomplishments to following the same rules and wisdom in interview after interview. Walter Schloss is a perfect example.
c) Buffett a life long reputation for directness and honesty.
d) If he used the market price to validate his IV estimate in the PetroChina example, wouldn't he be forced to dramatically lower it, say to $60B to better match the price? So why did he wait until $200B to sell his shares? He always sells before stocks reach IV. It's hard to imagine he nearly quadrupled his IV estimate when earnings only doubled during that span.

So while it's always possible someone is lying, all evidence suggests it's extremely unlikely for Buffett to be lying about using market prices to validate his opinions. The burden is on you to show some evidence he ever has.

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The logic is almost irrefutable. It works like this:

Mr Market may be a manic depressive and you are not. But your estimates are admittedly far from perfect. And sometimes Mr. Market is feeling both sane and more expert about a stock (for legal or illegal reasons) than you are.
When that happens you are taking the worst of it when you invest. One way to insure an overall profit is to restrict yourself to trades where it APPEARS your edge is huge. Your edge won't be as huge as it appears because you will occasionally run into a sane, smarter (or more dishonest) than you Mr. Market. But that won't happen often enough to make up for the times you are up against crazy Mr. Market.

So the above method will work, though not to the degree it would appear. But it is leaving money on the table. Because it forces you to eschew what appears to be smaller edges, since you are not sure you are fighting smart Mr. Market. To get some of that money on the table requires an ability to know which Mr. Market has shown up today. If you are reasonably accurate you can start betting more of what appears to be 20% edges and sometimes pass on what looks like bigger edges.

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I think your error is that you think there is a huge amount of hidden information incorporated into most stock prices. Buffett and I would say not. Many business can be valued simply through audited financial statements. And that value usually doesn't change much depending upon the news from one quarter or who is running the company.

The market is generally not inefficient because of fraud or insider trading. It's because there are skills to valuing companies (FA) & making investing decisions (patience to wait for big margins of safety, rationality to focus on businesses where IV can be accurately estimated, resistance to Mr. Market and other negative influences,etc.) and there aren't that many skilled practitioners. And the smaller the market cap, the fewer skilled participants exist.

And missing small edges is probably +EV. If you can eventually expect to find big edges, pursuing smaller edges ties up time and capital on lower return investments just when it might be needed for the next PetroChina.