From Fortune’s Archive: Value Investing Standing the Test of Time and the Efficient Market Hypothesis
This is an ‘oldie but goldie’ article on value investing from Fortune that was published in 1995. In many ways, it harkens back to Warren Buffett’s article entitled “The Superinvestors of Graham-and-Doddsville” that was published in 1984 and in which he used the track records of alumni from Ben Graham’s classes at Columbia Business School to refute the efficient market hypothesis. The debate of ‘efficient markets vs. value investing’ has seemingly not changed all that much in the last 16 years — a fact that we are happy to quietly celebrate. This fact leaves us opportunities to find undervalued businesses that Mr. Market has incorrectly priced along the way.
“Like the shadows darkening the twisted canyons of Wall Street itself, one hard truth has hung over investors for more than a generation: You cannot beat the stock market. No matter how smart you are or how hard you try or how well you do in the short run, inevitably the market will pound your investment returns down to the average — and probably worse — before you get to the finish line.
Don’t believe it. As it turns out, that bedrock principle of investing may be one of the four great lies. No, it isn’t easy, but in theory and in practice, the simple, fairly astonishing truth is that you can beat the market, just as the four fellows pictured here have done for decades.
A claim like that goes straight to the infamous efficient-market theory (EMT) like a stake to a vampire’s heart. According to this theory, taught as financial gospel in most business schools, the price of a stock always reflects the best estimate of its true value. Since you always get what you pay for and must pay for what you get, you cannot reasonably expect to do better than anyone else in the market when you buy and sell stocks.
Maybe in theory. But over the years there have been stubborn dissenters from that creed. And now there is groundbreaking academic research showing what some savvy investors have always sensed was true: The prices of stocks are usually wrong. This is no mere eraser fight among a bunch of tweedy academics smoking pipes. When stock prices are wrong, investors able to spot the mistakes can make themselves money — lots of it.”