166 THE WARREN BUFFETT WAY
value. The more knowledge you have about your company, the less risk
you are likely taking.
“Diversif ication serves as protection against ignorance,” explains
Buffett. “If you want to make sure that nothing bad happens to you rel-
ative to the market, you should own everything. There is nothing wrong
with that. It’s a perfectly sound approach for somebody who doesn’t
know how to analyze businesses.”^11
Buffett’s View of the Efficient Market Theory
Buffett’s problem with the EMT rests on a central point: It makes no
provision for investors who analyze all the available information, as
Buffett urges them to do, which gives them a competitive advantage.
Nonetheless, EMT is still religiously taught in business schools, a
fact that gives Warren Buffett no end of satisfaction. “Naturally the
disservice done students and gullible investment professionals who
have swallowed EMT has been an extraordinary service to us and
other followers of Graham,” Buffett wryly observed. “From a self ish
standpoint, we should probably endow chairs to ensure the perpetual
teaching of EMT.”^12
In many ways, modern portfolio theory protects investors who have
limited knowledge and understanding on how to value a business. But
that protection comes with a price. According to Buffett, “Modern
portfolio theory tells you how to be average. But I think almost any-
body can f igure out how to do average in the f ifth grade.”^13
THE SUPERINVESTORS OF BUFFETTVILLE
One of the greatest investment books of all time came out in 1934, dur-
ing the height of the Great Depression. Security Analysis,by Benjamin
Graham and David Dodd, is universally acclaimed a classic, and is still
in print after f ive editions and sixty-f ive years. It is impossible to over-
state its inf luence on the modern world of investing.