Have you ever been told that picking stocks is a fool’s game? That you should just buy an index fund because “you can’t beat the market”?
This idea, born in university classrooms, is called the Efficient Market Hypothesis. It says all stock prices are always perfectly “correct.”
I’ll let you in on a secret. Over 20 years ago, I was sitting in an Ivy League MBA class, learning this exact theory. With its complex math, it felt like I’d been handed the secret code to finance. I treated it like gospel.
But when I started investing in the real world, the theory fell apart. It was only when I returned to the simple wisdom of Warren Buffett’s value investing that I realized the truth: the ‘perfect market’ was a beautiful lie, and understanding the emotional “Mr. Market” was my greatest tool.
The “Smart Market” Theory vs. Reality 🧑🏫 vs. 🤯
According to professors, investors like Warren Buffett shouldn’t exist. His decades of crushing the market are just a statistical fluke. An “aberration.”
But legendary investor Seth Klarman points out a simple truth: the theory is wrong. The proof is that dozens of investors, following the same principles as Buffett, have also beaten the market for decades.
Are they all just lucky? Or is the theory missing something huge?
The Real Reason the Market Is Messy: Us! 🧠
The market isn’t a perfect supercomputer. It’s made of millions of people who get greedy, scared, and swept up in hype. We are the reason the market isn’t efficient.
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FOMO (Fear Of Missing Out): We pile into hot stocks like GameStop or during the dot-com bubble, pushing prices to insane levels.
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Panic Selling: When a crisis hits, like in 2008 or 2020, we dump perfectly good companies out of fear.
This is where your opportunity lies. The market’s mood swings create bargains for those who stay calm.
How to Think Like a Pilot, Not a Passenger ✈️
Klarman tells a great story. You can learn to handle a wild horse by reading a book, or you can actually get in the saddle and learn to ride.
Academics are the book readers. They create theories from the safety of their office.
Real investors are the pilots. They know that in the real world, there’s turbulence. They learn from experience and spot opportunities that the theorists, with their perfect models, say shouldn’t exist.
Your Opportunity: Be Calm When Others Aren’t
You don’t need a Ph.D. to be a great investor. You just need to understand one thing: price is what you pay, value is what you get.
The market’s emotions constantly create gaps between the two. Your job is to find them.
What’s the most emotional market moment you remember? Share in the comments!
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