warren Buffett on point 3
Ignore modern financial theory.
Buffett says modern financial theory is fundamentally flawed. His consistent long term success is evidence that the efficient market hypothesis is wrong. He says beta is a silly way to measure risk. He thinks diversification is counterproductive for anyone skilled at investment selection. He says financial models oversimplify things, underestimating the frequency of black swans and assuming that what hasn’t happen can’t happen. Markets are more dependent on behavioral science than physical science, but the models don’t adequately factor in human behavior. Investing is part art and part science, and the models don’t capture the artistic side of the process. Buffett says you’re better off ignoring most of modern financial theory.
Ignore modern financial theory.
Buffett says modern financial theory is fundamentally flawed. His consistent long term success is evidence that the efficient market hypothesis is wrong. He says beta is a silly way to measure risk. He thinks diversification is counterproductive for anyone skilled at investment selection. He says financial models oversimplify things, underestimating the frequency of black swans and assuming that what hasn’t happen can’t happen. Markets are more dependent on behavioral science than physical science, but the models don’t adequately factor in human behavior. Investing is part art and part science, and the models don’t capture the artistic side of the process. Buffett says you’re better off ignoring most of modern financial theory.
