Efficient Market Theory

Efficient Market Theory (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information1. In Buffet's words, it said that analyzing stock was useless because all public information about them was appropriately reflected in their prices.

Active investing is an investing strategy that a fund's manager(s) attempt to challenge the market with various investing strategies associated with numerous analytical research and forecasts. Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading3. The concept of passive investing is building steady wealth overtime while active investing often seeks for short-term profits (active investors often monitor the stock price movement and look at their stocks many times a day). Passive investors tend to believe in the EMH as they believe that consistently outperforming the market for the professional and small investor alike is difficult and therefore, passive investors will only manage to match market performance.

From the essay, we could know that he is strongly against this theory and says it is foolish. Buffet suggests that an investor can only earn superior profits by carefully evaluating facts and continuously exercising discipline. However, he also suggests that 'By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals.'4 This express that he think that for those who does not have professional knowledge of investing and the industry/company they are planning to invest should not analyze deeper but should go to index fund – passive investing. Buffet himself is practicing active

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