A random walk down an efficient market

“You only find out who is swimming naked when the tide goes out.”

“A girl in a convertible is worth five in the phonebook.”

“Let blockheads read what blockheads wrote.”

Yeah, solid small talk there Warren. Got to go return some videotapes now.

It’s no secret that I’m not a fan of Warren Buffett, but the old coot does have his moments every now and again.

I was reading More Money than God yesterday and I really enjoyed how he took down the Efficient Market Random Walk moodges...

“The few money managers who appear to defy the random-walk hypothesis are merely lucky, Jensen assured his listeners. Sure, some beat the market for five years straight. But if you asked a million people to flip coins, some would flip five heads in a row. There is no skill in coin flipping—and investment is no different.

Then Warren Buffett delivered a rejoinder that could serve as a hedge-fund manifesto. He began by playing along with Jensen’s argument, inviting his audience to imagine a national coin-flipping contest. At the start of the competition, everyone in America would flip a coin, and those who turned up tails would withdraw from the contest. At the end of ten rounds, 220,000 flippers would be left—and, human nature being what it is, the survivors would start to get a little cocky. At the end of twenty rounds, the 215 remaining contestants would start to wax insufferable, publishing fatuous books on the art and science of coin flipping. But then some business-school professor would point out that if 225,000,000 orangutans engaged in a coin-flip-a-thon, the results would be the same. There would be 215 egotistical orangutans with twenty straight winning flips.

Having made Jensen’s argument better than Jensen, Buffett proceeded to cut holes in it. If the 215 winning orangutans were distributed randomly about the country, their success could be dismissed as luck. But if 40 of the 215 winners hailed from the same zoo, wouldn’t something else explain their coin flipping? Phenomena that appear statistically random can appear altogether different when you consider their distribution, Buffett was saying. If you found that a rare cancer was common in a particular village, you would not put that down to chance. You would analyze the water.”

Granted, this was geared more toward the Random Walk theory but nevertheless, it’s really funny how the Efficient Market Hypothesis is still alive today - not just alive, but sometimes taught in schools around the world by Professors with credentials up the wazoo.

Are there any Efficient Market/Random Walk people here on WSO?

I for one believe its as bullshit as the Huffington Post.

Sure, the markets can, will, and does discount information and expectations but all you need to do is look at the bubbles of the past decades and through the 10-k’s of overpriced stocks today to see that it doesn't work.

Gold, by any other standard, is definitely not worth $1,388 per ounce. Neither are most of the commodities worth what they are today, a whole bunch of stocks, and a shit ton of I.P.O.’s as well.

Anybody remember Tesla’s a few months back? That was efficiently priced for sure.

How about you guys? What are your thought on these theories?

Is there really any truth to them? Or should I keep my random walking to nights out on Johnny Walker?