I like your style and I do own some BRK-B (not enough I have to say). I wonder what’d happen when he retires.

@James — Thank you for your comment. I love to hear other perspective, especially ones that are different from mine. I can tell you are very knowledgeable about this subject and I appreciate your thought on this.

So many assumptions in the original EMH are bounded by axioms that are never present in real situations.

For example, people are not always rational. We do stupid things. Emotions and emotional contagion do not coexist with rationality. Irrational behavior can dominate markets. If people were completely rational they would be somewhat predictable, at least on the aggregate level, and then you could profit and you would have a paradox for the EMH.

Another example, markets are not always in equilibrium. In fact, markets are rarely in equilibrium. In economics, so many variables in its models are held constant and are essentially frozen in time. The term Ceteris paribus applies to all economic models and it fails to take into account second, third and fourth order effects in the real economy. In reality markets are dynamic entities and the plethora of side effects are magnificent. Being able to see these effects allows for profits.

Also, EMH (in its stronger forms) assumes that prices reflect all available information and thus you cannot trade on this information. Well, if you had an extremely well dispersed set of information this would make sense, and some would argue that the modern world provides such a set. I argue that its not. So many companies and organizations hold monopolies on this information (institutional investors, hedge funds, i-banks, obviously insider traders but there are laws against that, etc). This grants them the ability to generate abnormal economic profits over the lay-investor.

The obtuse conclusion of the EMH that you cannot profit from information in the market is inconsistent with Ricardian Comparative Advantage. If you know about the principle of Time Value of Money you already present yourself as one who holds a comparative advantage in this market. You are instantly better equipped to analyze equities over anyone (I would say 99% of US pop.) who doesn’t know this principle.

If you apply the EMH to other markets besides financial markets, corporations and entrepreneurs have no incentive to enter the market. The EMH assumes a perfectly competitive market and this is perhaps the most ridiculous idea in economics. A perfectly competitive market is one where no one makes a profit. Wait a minute, a market where no one makes a profit? Are you joking me? Why does the market exist then? Isn’t this counter intuitive to economics?

Lastly, if you do subscribe to this ridiculous cult, than why can’t you see that passive investing and active investing mutual funds are both contrary to EMH. If you really believe in EMH you would put all your money in Indexes.

Like I said before, Modern Finance is a bunch of Voodoo made up by economists with mathematics/physics envy who try to place broad theories on the economy. They differ from these pure sciences in that when evidence is found that proves a theory wrong, the theory is thrown out. With the EMH, this is apparently not the case.

It is too bad that the EMH and modern portfolio theory is abused by finance professional, like brokers and financial advisers, to cheat money out of hard working Americans who lack financial acumen.

My point here is that Buffett – the world’s greatest investor – did not have any secret insider knowledge. Although he’s a genius when it comes to numbers, he got all of his information from public sources: annual stockholder letters, press releases, etc. While it is true that he used to “lead and manage” some of his companies, it is not his general policy. For example, he does not manage the Coca Cola company – or GEICO – or most of his other companies. His main strategy is to find a good deal on a great company, pick an honest, hard-working manager, sit back and relax.

Also, I don’t think many people can be the next Warren Buffett – my main point is that this man outlived lots of economic theories and fads (like the “go-go” funds of the sixties, for example), and came out a winner by buying good stock cheap and holding on to it. And since ours is a free economy, I believe the best way to invest is to buy a share of Berkshire-Hathaway and let the world’s best investor manage your money.

It’s a problem when average investors think they can be Warren Buffett. Beside, he’s not only an investor, he also lead and manage companies that he “invested” in.

Two words: Warren Buffett.

Nice list of funds, but how do you explain the other two third that failed to live up to their respective indices? Please note that I am not arguing that indexing is the best for everybody, but for the general public with limited investing experience, I’d say it’s pretty good strategy.

“If markets were really efficient then all 250,000 CFA’s and fund managers would come to the same conclusions about the same economic data, and there would be no mutual fund industry.”

Even if all CFA and fund managers know that EMH is true, they wouldn’t admit it would they? That’s their livelihood. Why would anyone admit that their jobs add very little value.

“If markets were efficient there would be no Tech Bubble, no Housing Bubble, no Asian Contagian, no 1987 Crash, etc. etc. etc.”

That’s not what efficient market is about, is it? EMH is about the speed at which the market incorporate new data. But I do agree that EMH doesn’t do a good job of explaining certain emotional reactions (i.e., crashes).

In secular bear markets indexing just means you’ll have no growth in your portfolio for 15-20 years or however long the bear market lasts.

That assumes I am putting all my money in one basket. That’s why we have diversification, international investment, low (or negative) correlation investments,

“Why do Vanguard’s actively managed funds beat their index funds? Hmmm? C’mon now – you didn’t know that?”

Someone bound to beat the average right? But what’s the cost of beating that average, or better yet, how could average investors identify winners among thousands of losers?

If I have 25% chance of beating the average, and 75% chance of underperforming the average, I choose the average — thank you.

“invest more conservatively than your “risk tolerance” indicates you should. Everyone is a risk taker when they are making money. Everyone is insanely risk averse when they are losing it. Pain is greater than gain.”

Great advice

Everyone here needs to get a subscription to Hulbert and spend some serious time evaluating several, if not dozens, of the top letters he tracks to find a strategy that rings with your personality and then stick to it. Be prepared to spend time and money investigating. There are some gems there. I won’t tell you which ones, though, because I’ve spent years figuring out what works and what doesn’t. You won’t appreciate it if you don’t put your own sweat into it. Please do NOT invest until you’ve examined the claims, methodologies, and performance records of at least a dozen of these letters. Here’s my one clue: confine yourself to the best risk-adjusted returns category.

My last piece of advice – invest more conservatively than your “risk tolerance” indicates you should. Everyone is a risk taker when they are making money. Everyone is insanely risk averse when they are losing it. Pain is greater than gain.

And so you don’t think I’m just blustering I’ll have you know I came through the bear market only down 4%, and have made a truckload of money since then. My compound rate of return for the last 8 years, including the savages of the bear market, is about 12% per year. In other words, I’ve more than doubled my money since the beginning of 2000. Have you??? (PS – I could care less whether you believe me or not.)