Mr.Market’sBipolarDisorder 15companies which consistently maximize the full potential of a busi-
ness, wisely allocate capital, and channel the rewards of this success
to shareholders. They emphasize the importance of exceptionally
competent managers who own substantial amounts of equity in their
own companies and can rapidly adapt to dynamic business condi-
tions. They also believe that managerial depth and integrity include
assuring good relations with labor and promoting an entrepreneurial
spirit.
The hedge fund master George Soros summed it up well by say-
ing that “the prevailing wisdom is that markets are always right; I
assume they are always wrong.” The prevailing wisdom of market
efficiency is one way to view markets. In this view, price changes are
due almost exclusively to changes in fundamental values. Therefore,
a diversified selection of stocks with different pricing behaviors com-
pared to the overall market makes the most sense. The contrary view
says that lots of price changes occur for nonfundamental reasons.
The goal here is to identify those companies whose prices are below
their business value. This perspective calls for thinking about indi-
vidual businesses rather than the overall market.
The next two chapters offer the alternative foundations of these
two competing ways to thin kabout mar kets. Chapter 2 is a history
of how the efficient market idea came into being. Chapter 3 is an
account of evidence that contradicts EMT on its own terms. If you
are already a skeptic of market efficiency, you can skip these two
chapters as a practical matter (though they contain valuable insights
on the merits of the competing views). If you are an efficiency dev-
otee, you should read them and be prepared to change your mind.
Either way, Chapter 4 assesses the current environment for clues
concerning whether the direction in which we are heading is better
described by the efficient market idea or by what might be called
the “chaotic” market idea. It finds that we are heading toward less
rather than more efficient markets. The rest of the book adopts the
view of the investment masters that stoc kmar kets are not perfectly
efficient and provides the equipment you need to take advantage of
the inefficiencies.