Marcus Padley, a stockbroker, made the following statements in an article in the Sydney Morning Herald.

I love ‘The Warren Buffet Way. In fact, one of my first clients introduced himself by saying, ‘I am Fred and I’d like to invest in the Warren Buffet Way. Well whoopee, do! What shall we do? Get the annual reports of the top 200 companies. Analyze the accounts of each, assess ‘value’ and then go to the stock market and find out that ‘wow, I’m right and the whole market is wrong’ and the share price is trading below the true ‘value’. Then purchase the shares and wait for that value to inevitably emerge.

In fact, most Warren Buffett-based approaches are terrible at timing, which in reality is about the only thing that really matters. In an increasingly impatient market, it is not just about ‘what’, it is becoming all about ‘when’. Investors who sat through the 54.5per cent fall in the market during the financial crises need to earn 113% to get their money back. That’s 13 years of compounding average annual returns. Not caring about ‘when’ just cost us 13 years.

Critically evaluate the two statements made by Marcus Padley in the context of capital market research.

ANSWER GUIDE BELOW-

First statement:

EMH(Efficient Market Hypothesis) says that share prices reflect all available information

Accounts in the annual reports are based on accounting principles which do not capture all the information relevant to share prices

Earnings management may distort the accounts

Second statement:

Focus on behavioural finance – investors do not sell early enough.

Answer rating: 100% (QA)

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