The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [315]
The professors who had discovered this efficient-market hypothesis (EMH) kept hacking away at their computers over the years, however, to turn these ideas into an even tighter version, one that had the purity and rigor of physics and mathematics, one to which there could be no exceptions. They concluded that nobody could beat the average, that the market was so efficient that the price of a stock at any time must reflect every piece of public information about a company. Thus, studying balance sheets, listening to scuttlebutt, digging in libraries, reading newspapers, studying a company’s competitors—all of it was futile. The price of a stock at any time was “right.” Anybody who beat the average was just lucky—or trading on inside information.
Most people who actually worked on Wall Street could cite examples of stocks that had traded inefficiently.40 But it was certainly true that exceptions to the efficient market had grown rarer—and the people who exploited them generally had a steady pulse and deep knowledge based on long study, and the willingness to put in full-time concentrated effort. Yet the proponents of EMH denied all exceptions, and to them Buffett—the most visible exception of all—and his lengthening and increasingly acclaimed record became an inconvenient fact. They saw him as like a man who could sail blindfolded through a sea of icebergs: in theory impossible; it was only a matter of time before he would drown. The “random walkers”—Samuelson at MIT, Fama at the University of Chicago, Michael Jensen at the University of Rochester, William Sharpe at Stanford—kicked around the Buffett conundrum. Was he a one-off genius or a freak statistical event? A certain amount of derision was heaped on him, as if such an anomalous stunt were not worthy of study. Burton Malkiel, a Princeton economist, summed the whole thing up by saying that anyone who outperformed the stock market consistently was no different from a lucky monkey that had a winning streak at picking stocks by throwing darts at the Wall Street Journal stock listings.41
Buffett loved the Wall Street Journal; he loved it so much that he had made a special deal with the local distributor of the paper. When the batches of Journals arrived in Omaha every night, a copy was pulled out and placed in his driveway before midnight. He sat up waiting to read tomorrow’s news before everybody else got to see it. It was what he did with the information the Wall Street Journal gave him, however, that made him a superior investor. If a monkey got the Wall Street Journal in its driveway every night just before midnight, the monkey still could not match Buffett’s investing record by throwing darts.
Buffett made sport of the controversy by playing with a Wall Street Journal dartboard in his office. The efficient-market hypothesis invalidated him, however. Furthermore, it invalidated Ben Graham. That would not do. He and Munger saw these academics as holders of witch doctorates.42 Their theory peddled bafflemath, teaching a whole generation of students something disprovable. They offended Buffett’s reverence for rational thinking and for the profession of teaching.
Columbia held a seminar in 1984 to celebrate the fiftieth anniversary of Security Analysis. Buffett was by then so identified as Ben Graham’s intellectual heir that Graham himself had asked him to revise and update The Intelligent Investor. The two were not able to agree on certain things—principally Buffett’s belief in concentration versus Graham’s devotion to diversification—and in the end Buffett wrote only the introduction. Nevertheless, Columbia invited