Tuesday, September 10, 2013

Money Wisdom #178

"The theory [of efficient markets] cannot withstand even a moment's thought. You buy or sell a security, say the common stock of Netscape Inc., not because you know it will go up or come down or stay the same, but because you want it to do one of those things. What is condensed in a price is the residue not of knowledge but of embedded desire, which may respond to new information and may not. At the time of writing, Netscape is priced in the stock market at 270 years' profits, a multiple that implies a 50 per cent rise in its reported earnings every year for eternity: such a price belongs outside the realm of knowledge. The efficient-markets doctrine is merely another attempt to apply rational laws to an arena that is self-evidently irrational. A market cannot operate by laws, for the laws would be discovered, and it would cease to be a market."

James Buchan Frozen Desire (1997) p.240

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