Now let's talk about efficient market theory, a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact, one of the economists who won--he shared a Nobel Prize--and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn't quite as efficient as you think, he said, "Well, it's a two-sigma event." And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas--better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.
I'm surprised by how consistently misinterpreted the EMH is, even by people with the widest possible perspective on markets and economics. The EMH practically requires that some people make money by trading, because that's the mechanism which causes the market to become efficient. The EMH should really be understood to mean that as more and more money is leached out of the market by speculators, prices become better and better approximations to real net present values.
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