Believe in my theory -- it's wrong

Reading a biography of Warren Buffet led me to an important conclusion that I would have expected to reach – that it can be socially constructive for large groups of people to believe and act on something that’s materially false.

The theorem that I’ve decided is false is called the Efficient Markets Hypothesis, which holds that investors are best served by buying indexes of mutual-fund type packages of stocks instead of choosing individual stocks in efforts to get better returns than the market average. The theory is based on the idea that all publicly available information about a company is already factored into its share price, meaning the market always set the right price for a stock at any given moment. I was for years a believer in this particular theory, but am no longer simply because Warren Buffet has blown the idea out of the water.

After reading Roger Lowenstein’s page-turning biography of the Sage of Omaha, as Buffet is known, I came to the conclusion that Buffet is a guy who simply *knows* how markets work. There aren’t a lot of these in the world, and generally a good deal fewer than those that claim to know. But just about every step in Buffet’s career demonstrates his ability to make money came from being able to understand the intrinsic value of a company and take advantage of the moments when the market for some reason undervalued it. There just aren’t a lot of ways of explaining how Buffet beat the market every year for more than thirty years if he was just throwing darts at a dartboard.

I’ve given up on the idea of markets being efficient, particularly watching the herd mentality of the investment community. But I’m glad I believe all those years even if it was wrong. Because Lowenstein’s book taught me something else – I ain’t Warren Buffet. I do not have the firmness of character to sink millions of dollars into an investment when the whole world is telling me it’s a losing bet, much less buy even more of a stock once my holdings have already slumped 30 percent. I do not have the financial acumen to memorize hundreds of balance sheets and keep the data stored in my head for a decade. I do not have the capacity to learn and study the dynamics of dozens of different industries at the same time.

So that leaves me with the alternative – take what the market gives me. Believing the wrong thing saved me a lot of money. And I think I’d be happy to see other folks avoid losing money themselves by continuing to believe something of questionable veracity.