The Efficient Market Hypothesis (EMH) teaches that no one can beat a general market index over the long run because the market instantly adjusts to all new information. The EMH has been mainstream dogma for longer than Warren Buffet has led Berkshire. Buffett doesn’t like the EMH and responded to the theory in this story that I included in my book Financial Bull Riding:
Warren Buffett got to the heart of the problem with the EMH at a 1984 conference at the Columbia Business School held to honor the 50th anniversary of Benjamin Graham’s Security Analysis. Finance professor Michael Jensen, a defender of EMH, told the audience that investors such as Buffett who beat the market were just lucky. The EMH did not assert that no one could get lucky; only that they couldn’t get lucky consistently. “If I survey a field of untalented analysts, all of whom are doing nothing but flipping coins,” Jensen said, “I expect to see some who have tossed two heads in a row and even some who have tossed ten heads in a row.”
