Efficient Market Hypothesis

Over the next few months, while we get all the regulatory loose ends tied off prior to our July 1st 2011 ‘informal’ launch of EGP Fund No. 1, I will periodically post some information to direct our investors to the philosophical foundation of my investment choices and beliefs.

I am an unashamed fan of Warren Buffett as an investor, as I am of a great many other ‘super-investors’.I have reviewed extensively Buffett’s career and writings and would encourage anyone with a genuine interest in wealth creation to do the same.

Academics frequently posit that it is impossible for an individual to beat the benchmark consistently over a period, due to all known information being rapidly reflected in stock prices.The link below (authored by Buffett) is easily the best counter to that argument, and has never been successfully explained by efficient market theorists.


The most fascinating aspect of investment to me is the idea of competing against the ‘collective intelligence’ of the market.I am by nature an enormously competitive individual; the S&P/ASX200 (TR) index is the yardstick by which I measure the collective result of the market.Consistent out-performance of this benchmark can mean only one thing in my view; the accumulation of substantial wealth.

Whilst, like most people who have had a considerable measure of success in outperforming the stock-market, I am reluctant to attribute any of my success to ‘luck’, I would freely acknowledge that the idea of the market being relatively efficient is not completely baseless.The information instantaneously available to individual and professional investors alike means that the quantum of the discrepancy is significantly smaller than it has ever been in the past.The incredible reach of globalisation – the internet and telecommunications means information is disseminated swiftly and seamlessly to an audience with a great and growing capacity to interpret that information and quantify its impact on the current and future prospects of businesses.

That is to say markets are much more efficient than they were in the 1950’s or 1960’s, but they are not, and never will be, perfectly efficient.The likelihood of any investor ever creating anything like the returns of the Buffett partnership, which between 1957 and 1969 outperformed the Dow by 22.1% p.a. annualised, is close to zero in my opinion.

It is my belief, through in-depth analysis, I could outperform the S&P/ASX200 (TR), even investing only in ASX50 companies (the 50 largest in Australia).At the moment, I think BHP and RIO both represent very good value and will perform better than the indices and most other stocks in the ASX50; I find it difficult to separate the two at current prices.I would rank the big 4 banks in 2 classes CBA & WBC representing better value than ANZ & NAB.That said, I would be unlikely to invest in any of these given the substantially more favourable valuations to be found in the smaller companies.

The smaller the business, the greater the likelihood of the market mis-pricing the enterprise value.Companies worth less than $1b are most frequently mis-priced, and until the day I am managing truly substantial sums of money, I will spend most of my analytic time and effort outside of the ASX100 stocks – Tony Hansen 03/11/10