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Where do we go from here?

The younger, behavioral finance academics have convincingly demonstrated that perverse psychological and emotional factors often

distort the “efficient” functioning of investors individually and markets systematically. And it happens with distressing frequency and impact.

There are at least two major gaps, however, in the economic literature. One, of course, has been the failure to look directly at the role and

performance of those rational investors who populate the academic models. Even while cataloging so many of the behavioral errors with

microscopic detail, scholars failed to look at the positive side of the process. That’s what I attempted to do here. Buffett, as noted, wrote a similar

study on the 50th

anniversary of the publication of Graham and Dodd’s “Security Analysis.” But that’s


Why the academic failure? Perhaps it’s because the dramatic success of these value investors casts a long, very long, shadow on the notion of an efficient market and also on ancillary concepts such as the capital asset pricing model. Beyond that, however, these funds’ performance can be measured, but their methods are highly qualitative and judgmental, focused as they are on the inherent uncertainties of business risk and value, not on readily quantifiable market data. Value fund managers make lonely judgments that may not be vindicated for years to come. Jim Gipson of the Clipper Fund commented, not without regret, that “[i]ntelligence is a necessary condition for success in this business, but it is not a sufficient one.”71 Patience, investment philosophy,

temperament – these do not lend themselves to the algebraic formulae and computer models that are so popular in the academy.

Will we have to wait another 20 years for a study of rational, value investing? Lynn Stout fears that our academic colleagues may now

fall back on one of those tired cliches, such as that if you put 1,000 monkeys in front of a dart board, some random ten or twenty will hit the bulls-

eye. Or they may say that five years are not enough. Or simply ignore this study, as happened to Buffett’s? No single study is ever enough, but

one of the attractions of the period 1999-2003 was the exquisite pressure on the Goldfarb Ten to abandon their value principles.4 This was not a

random group of investors selected simply with 20-20 hindsight, but rather one which, because of their adherence to rigorous security analysis,

4This writer did not extend his study of those ten funds back beyond the year 1999, in part because not all of the group existed or were under the same continuous management for, say, ten years. In fact, the financial press has at times singled out several of them for their outstanding performance over ten and even twenty periods. Hey, take a look.


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