Buffett: The Making of an American Capitalist

by Roger Lowenstein

The premise of Buffett’s career was that stockpicking, though difficult and subjective, was susceptible to reasoned analysis. Occasionally, certain stocks sold for far less than they were “worth.” An astute investor could profit by buying them. In place of that rather modest maxim, scholars had substituted a seductively simple but unifying design, the Efficient Market Theory. In a nutshell, the theory said that at any moment, all the publicly available information about a company was reflected in the price of its stock. Whenever news about a stock became public, traders pounced, buying or selling until its price reached equilibrium. Underlying this truism was an assumption that the old price had been as “wise” as traders could make it. Therefore, the new price—and each succeeding new price—would be wise as well. The traders merely did the work of Adam Smith’s Invisible Hand.