Shares of CarMax (NYSE: KMX) soared 7.5% last week on rumors that Berkshire Hathaway's (NYSE: BRK.A) Warren Buffett was was buying.
But it wasn't so. In reality, Berkshire subsidiary Geico was buying the stock. While that company's stockpicker, Lou Simpson, has a strong reputation, it is not up to the level that his involvement sends stocks flying.
But let's think about the wisdom of stocks going up because Buffett is buying, and whether it fits into the efficient market hypothesis, the theory taught in finance classes across the country. The theory states that the market is a nearly perfect discounting mechanism, and that the current stock price reflects the present value of the company's future cash flows.
If that's true, why did CarMax go up 7.5% on rumors of Buffett's interest? That's a gain in value of more than $300 million and, this is important, Buffett is never an activist investor. He buys companies where he likes the management, and makes no effort to shake things up. So how could his buying possibly add $300 million to the present value of CarMax's future cash flows?
I'm generally a believer in at least the weak form of the efficient market hypothesis, but there are all kinds of little holes in the stronger form, and the phenomenon of copycat buying would appear to be one of them
Warren Buffett not buying CarMax after all -- Are markets efficient?
Posted Nov 20th 2007 11:30AM by Zac Bissonnette
Filed under: Rumors, Berkshire Hathaway (BRK.A)
AP
- HEALTH RISK? Top 10 Highest-Radiation Cell Phones - CNBC
- SHHH! 10 Things Dermatologists Won't Tell You - SmartMoney
- PAY DISPARITY: Pay Gap Persists for African-Americans - CNNMoney
- BRAVE NEW WORLD: The Search Party Is Over for Google - FORTUNE
- A TOUGH SELL: Does the Female Condom Have a Chance? - Salon
- AVOID STICKER SHOCK: Four Ways to Cut Text Book Costs - FOX Business
- USE A CREDIT COUNSELOR? Key Questions You Must Ask First - Forbes
Comfort Zone Investing: Unconventional Thinking Needed
BP to Begin Scaling Back Oil Cleanup
Oil's Uncertain Economic Outlook
Reader Comments (Page 1 of 1)
1-31-2008 @ 12:22PM
Squat Kromera, Wroclaw said...
If Buffett buys, folks have reason to believe the stock is undervalued. The "gain" may then be viewed as an adjustment towards the true value.