Efficient Markets

Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.

- Warren Buffett

Benjamin Graham has said that market is a voting machine over a short term period, and over a longer period it is weighing machine truly reflecting the strength of the company. Thus markets are efficient to truly judge the best from the worst.

But the efficient market theory has wrongly concluded a long term efficient market is also efficient in the short term.

This can be seen from the following example. During the height of the recent financial crisis, when the stock holders were assumed that all the financial sector companies were same as Lehman Brothers or Bear Stearns. This lead to the conclusion that none of the financial sectors are worth to hold and dumped the shares in droves. The result is a highly respected company like HDFC was quoting below 1300. Once the fear has subsided, the same market has re-priced HDFC at a price above 2500.

For a true "investor", market provides the opportunity to buy companies at great price and sleep well during every night.