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In his latest letter to Berkshire Hathaway shareholders Buffett wrote about Mr Market causing the stock market to frequently be inefficient in pricing shares. Mr Market throws up bafflingly high prices in some instances – way above intrinsic value – and in others baffling low prices, way below intrinsic value.
We value investors do not trust Mr Market to provide a valuation service. We have to do that ourselves.
Mr Market merely “prices” through its “voting machine” mechanism; often it does not display intrinsic value in those prices through a rational “weighing machine” of the facts (as Benjamin Graham pointed out)
“One advantage of our publicly-traded segment [shareholdings of market-traded companies that are not sufficient for boardroom control] is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.” Warren Buffett, 2023)
So much for the “Efficient Markets Theory” beloved by many academics.
Do not expect to perform really well with all share choices
Buffett goes on to tell us that his experience has been that most of his share choices have been mediocre, some almost ended in disaster.
This should give us some comfort when struggling with our own so-so investments. The world’s greatest investor does not shoot the lights out with every share pick.
Instead he relies on biasing the odds of the portfolio as a whole outperforming by working really hard analysing every company he buys in detail (e.g. strength of economic franchise, quality of managers, financial stability). The bias manifests itself in a few of those thoroughly analysed companies doing exceptionally well:
“In 58 years of Berkshire management….
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
