Buffett (1988): Arbitrages and Efficient Market Hypothesis

From Warren Buffet's 1987 letter to shareholders, we got to know his preference for businesses that are simple and easy to understand. In the same letter, Buffett also explained the concept of 'Mr Market' in a rather detailed way. Let us now see what the master has to offer in his 1988 letter to shareholders.

The year 1988 turned out to be quite an eventful one for Berkshire Hathaway, the master's investment vehicle. While the year saw the listing of the company on the New York Stock Exchange, it also turned out to be the year when Buffett made what can be termed as one of its best investments ever. Yes, we are talking about the company Coca Cola. The letter too was not short on investment wisdom either. Although he did discuss previously touched upon topics like accounting and management quality, these are not what we will focus on. Instead, let us see what the master has to say on some novel concepts like arbitrage and his take on the efficient market theory.

For those of you who would have thought that Warren Buffett is all about value investing and extremely lengthy time horizons, the mention of the word 'arbitrage' must have come as a pleasant surprise or may be, even as a shock. However, the master did engage in 'arbitrage' but in very small quantities and this is what he has to say on it.

"In past reports we have told you that our insurance subsidiaries sometimes engage in arbitrage as an alternative to holding short-term cash equivalents. We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas. At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments."

First of all, let us see how does he define arbitrage.

"Since World War I the definition of arbitrage - or "risk arbitrage," as it is now sometimes called - has expanded to include the pursuit of profits from an announced corporate event such as sale of the company, merger, recapitalization, reorganization, liquidation, self-tender, etc. In most cases the arbitrageur expects to profit regardless of the behavior of the stock market. The major risk he usually faces instead is that the announced event won't happen."

Just as in his long-term investments, in arbitrage too, the master brings his legendary risk aversion technique to the fore and puts forth his criteria for evaluating arbitrage situations.

"To evaluate arbitrage situations you must answer four questions: 

• (1) How likely is it that the promised event will indeed occur? 
• (2) How long will your money be tied up? 
• (3) What chance is there that something still better will transpire - a competing takeover bid, for example? and 
• (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?"

And how exactly does he differ from other arbitrageurs? Let us hear the answer in his own words.

"Because we diversify so little, one particularly profitable or unprofitable transaction will affect our yearly result from arbitrage far more than it will the typical arbitrage operation. So far, Berkshire has not had a really bad experience. But we will - and when it happens we'll report the gory details to you."

"The other way we differ from some arbitrage operations is that we participate only in transactions that have been publicly announced. We do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities."

Another important topic that the master touched upon in his 1988 letter was that of the Efficient Market Theory (EMT). This theory had become something like a cult in the financial academic circles in the 1970s and to put it simply, stated that stock analysis is an exercise in futility since the prices reflected virtually all the public information and hence, it was impossible to beat the market on a regular basis. However, this is what the master had to say on the investment professionals and academics who followed the theory to the 'Tee'.

"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

In order to justify his stance, the master states that if beating markets would have been impossible, then he and his mentor, Benjamin Graham, would not have notched up returns in the region of 20% year after year for an incredibly long stretch of 63 years, when the market returns during the same period were just under 10% including dividends. Hence, despite evidences to the contrary, EMT continued to remain popular and forced the master to make the following comment.

"Over the 63 years, the general market delivered just under a 10% annual return, including dividends. That means US$ 1,000 would have grown to US$ 405,000 if all income had been reinvested. A 20% rate of return, however, would have produced US$ 97 m. That strikes us as a statistically significant differential that might, conceivably, arouse one's curiosity. Yet proponents of the theory have never seemed interested in discordant evidence of this type. True, they don't talk quite as much about their theory today as they used to. But no one, to my knowledge, has ever said he was wrong, no matter how many thousands of students he has sent forth misinstructed. EMT, moreover, continues to be an integral part of the investment curriculum at major business schools. Apparently, a reluctance to recant, and thereby to demystify the priesthood, is not limited to theologians."

http://www.equitymaster.com/detail.asp?date=9/13/2007&story=3

A lot of investment behaviour is based on irrational decision-making, driven by emotion rather than logic. Behavioural finance is now playing an increasing role in investment decision-making.

From The Times
March 13, 2010

Investment masterclass: fight against your instinct to make a profit

You can boost stock market returns by avoiding typical behaviour patterns

David Budworth

Since the 1960s one grand theory has dominated investors’ views of how stock markets work. The efficient market hypothesis asserts that prices accurately reflect available information and investors behave rationally. It’s an elegant idea and leads to the conclusion that it is not generally possible to beat the market except through luck or inside information.

However, it doesn’t accurately reflect the world at all times, Therefore, it can be argued that it is not particularly useful for the poor investor trying to get a handle on markets. Which is why, over recent years, a second theory has been grabbing attention. This theory, called behavioural finance, accepts that markets are not always rational but it rejects the idea that they are completely random. Although behavioural finance initially was treated with scepticism in the City, it is now playing an increasing role in investment decision-making. Bringing insights from psychology to the world of finance, it asserts that a lot of investment behaviour is based on irrational decision-making, driven by emotion rather than logic. By understanding how average investors behave and the mistakes they make, you can learn how to avoid them.

James Montier, strategist at GMO and author of The Little Book of Behavioural Investing: How Not to Be Your Own Worst Enemy, says: “Our brains have been refined by the process of evolution, just like any other feature of our existence. But remember, evolution occurs at a glacial pace, so our brains are well designed for the environment that we faced 150,000 years ago, but potentially poorly suited for the industrial age of 300 years ago, and perhaps even more ill-suited for the information age in which we now live.”

This means that investors consistently make mistakes that damage returns. Here are some of the most common and how to learn to avoid them.

The narrative fallacy

Investors are easily won over by positive stories. Even when news is bad the predominant view is that things will get better. This encourages investors to favour companies that have done well in the past, even if they are expensive and can create bubble conditions.

Forcing yourself to focus on the facts should make you a better investor.

Overconfidence

When investors have a run of good luck they become more confident in their abilities. A study by the University of California academics Terrance Odean and Brad Barber found that if investors have a good run on the stock market, they often take higher risks, trading more actively and usually less profitably. In gambling circles this is known as the “house money” effect. People are more likely to bet recklessly with money that they have won than money they brought into the casino.

The best way to overcome this is to stick to an investment discipline. If you have had a good run and feel like putting more money into the market, take a step back.

Following forecasts

Mr Montier claims that experts are often more overconfident than the rest of us, yet we tend to follow authority blindly. Even though experience tells us that many forecasts are wrong, we cling to them because of a trait known as anchoring. In the face of uncertainty, we reach out for any irrelevant number as support. It is best to ignore the experts and their forecasts.

Information overload

People often believe that to beat the market they need to know more than everyone else. However, studies shows that excess information can lead to overconfidence, not accuracy, as it makes it difficult to distinguish noise from news.

Mr Montier says: “We would be far better off analysing the five things we really need to know about an investment, rather than trying to know absolutely everything about everything concerned with the investment.”

Denial

Investors give more weight to information that appeals to them. Learn to look for evidence that proves that your own analysis is wrong.

Loss aversion

Studies show that we are about three times more likely to sell a stock that has performed well than one that has done badly. We hang on to investments that have lost us money, even if the evidence suggests that they have farther to fall, because we cannot cope with the regret of having made a bad decision. To overcome this, set yourself a buy and sell target and keep to it.

Groupthink

It is hard to go against the crowd, which is why investors tend to follow the herd and buy the latest hot stocks and funds. You can turn this to your advantage by picking stocks that are cheap and out of fashion. But be warned: this strategy takes courage.

Focusing on outcomes

Mr Montier says: “When every decision is measured on outcomes, investors are likely to avoid uncertainty, chase noise and herd with the consensus.”

Instead, he argues, investors should focus on the process by which they invest: “The management of return is impossible, the management of risk is illusory, but process is the one thing we can exert an influence over.”

Leave the herd behind and get ahead

One of the key tenets of behavioural finance is that investors follow the herd, although chasing the latest fad often ends in disaster.

In the late 1990s, tech funds were all the rage and investors poured billions into them on the back of a run of stunning performances. After the tech bubble burst in 2000 many lost 90 per cent of their value.

Commercial property funds were the runaway bestsellers of 2006 . But this rush of money proved to be the last hurrah in an already overinflated sector.

So which funds have been selling like hotcakes recently? Bond funds were one of the big success stories of 2009, attracting £9.9 billion of net retail sales, according to the Investment Management Association, and investors who took the plunge were rewarded. Standard corporate bond funds produced returns averaging 14.6 per cent last year, while those investing in riskier high-yield bonds returned 46.4 per cent. However, many fund managers warn that any investor expecting a repeat of this performance in 2010 will be disappointed. More recently property funds have been the top-selling sector, with net retail sales of £373 million in January.

So if you want to try to overcome your herd instincts, what should you be investing in now? Alan Steel, of Alan Steel Asset Management, says: “The contrarian would shun property investments and gilts in favour of equities.

“Even though stock markets have soared in the past 12 months, sentiment is still very depressed about the future prospects of both equities and the global economy. Buying shares is still a contrarian stance.”

http://www.timesonline.co.uk/tol/money/investment/article7060010.ece

Can you, or indeed anyone, consistently beat the market?

Can you, or indeed anyone, consistently beat the market?

In other words, is the market efficient?  This is a question that every investor needs to think about because it has direct, practical implications for investing and portfolio management.



If you think the market is relatively efficient,

• then your investment strategy should focus on minimizing costs and taxes.  
• Asset allocation is your primary concern, and you will still need to establish the risk level you are comfortable with.  
• But beyond this, you should be a buy-and-hold investor, transacting only when absolutely necessary.  Investments such as low-cost, low-turnover mutual funds make a lot of sense.  
• Tools for analysing the market, particularly the tools of technical analysis, are irrelevant at best.  
• Thus, in some ways, the appropriate investment strategy is kind of boring, but it's the one that will pay off over the long haul in an efficient market.

In contrast, if you think the market is not particularly efficient,

• then you've got to be a security picker.  
• You also have to decide what tools - technical analysis, fundamental analysis, or both - will be the ones you use.  
• This is also true if you are in the money management business; you have to decide which specific stocks or bonds to hold.

In the end, the only way to find out if you've got what it takes to beat the market is to try.

• Be honest with yourself:  You think you can beat the market; most novice investors do.  Some change their minds and some don't. 
• As to which tools to use, try some and see if it works for you.  If it does, great.  If not, well, there are other tools at your disposal.  

The Professionals' Trade Secrets or What Methods do They Use?

In order to make a profit in the stock market, an investor must have some ideas regarding how the prices of stocks behave.  If he knows the behaviour patterns of stock prices, he may be able to forecast correctly what the price of a stock will be in the future. 

If his forecasted price is higher than the present market price of a particular stock, he ought to buy and reap the profit when the price rises to his forecasted level.  The reverse also applies in that if he thinks the price of a stock he is holding will decline in the future, he ought to sell it now and buy it back later on when the price will be lower. 

Stock market investment has become a very sophisticated, very scientific pursuit in the West and several schools of thought, that is, ways of thinking regarding how the stock prices behave, have been developed.  Each school is different from the other and may even be totally opposite; each attracting different supporters. 

There are what may be termed THREE 'legitimate ' schools of thought and AN 'unofficial' one. 

The unofficial school of thought is generally called

• 'The Greater Fool Theory' or'Buy from a Sucker and Sell to a Sucker' 

while the three legitimate schools are as follows:

• (1)  Random Walk / Efficient Market Theory (Hypothesis)
• (2)  Technical/Chartist School; and
• (3)  Fundamentalist School.

The stock market behaviour knows no boundary in place and time.  These various stock market theories developed in the West can be applied here too and a serious investor has to be familiar with these theories. 

Which of these four schools of thought is/are applicable to the local Malaysian market?  I am of the bias opinion that the fundamentalist school of thought is the one most applicable here.  It is most likely that many do not agree.

No expert agrees exactly with another regarding stock values. 

"There is no such thing as a final answer to stock values.  A dozen experts will arrive at twelve different conclusions" - Gerald Loeb


Ref:  Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

Why the Efficient Market Theory is Both Right and Wrong

Why the Efficient Market Theory is Both Right and Wrong

Once upon a time a couple of enterprising university professors got together and proclaimed that the stock market was efficient, meaning that on any given day a stock was accurately priced given the information available to the public. They also concluded that because of this efficiency, it would be impossible to develop an investment strategy that could do better than the market did as a whole. Because of the market's efficiency, they concluded, the most profitable approach to investing would be through index funds that go up and down with the rest of the market. (This type of fund buys a basket of stocks, without regard to price, representing the stock market as a whole.)

Warren Buffett recognizes that because 95% of all investors are hell-bent on trying to beat each other out of the quick buck, the stock market is very efficient. He sees that it is impossible to beat these people at their short-term game. He also realizes that the shortsighted investment mind-set that dominates the stock market is completely devoid of any true long-term investment strategy. You only have to look to the options market to see hard evidence of this.

• Short-term options trading, up to 6 months out, is a fully developed market with multiple exchanges, writing tens of thousands of option contracts, on hundreds of different companies, each and every day the stock market is open.
• The so-called long-term options market, up to 2 years out, is tiny and deals in fewer than fifty stocks. From Warren's investment perspective, 2 years out is still short-term.
• No exchange has an active options market writing contracts 5 to 10 years out. It simply doesn't exist.

Warren's great discovery is that, from a short-term perspective, the stock market is very efficient, but from a long-term perspective, it is grossly inefficient. He had only to develop an investment strategy to exploit the shortsighted market's inefficient long-term pricing mistakes. To this end, he developed selective contrarian investing.

Is the market efficient, always?

Is the market efficient, always?

But these conditions do not always exist. Market pricing and volatility of the late 1990s give reason to believe that these conditions did not exist. Some companies trade at prices bearing a discount from their intrinsic value – the key claim of value investing. Numerous other flaws infect beta, widely documented in a burgeoning literature over the past decade showing its declining utility.

General faith in beta requires general faith in efficient markets. But belief in efficient markets means the equity risk premium in the late 1990s was negative, zero, or very close to zero – that is the only way to make sense of the high stock prices prevalent in the late 1990s if markets are efficient. Under CAPM, a zero-market-risk premium implies a discount rate equal to the risk-free rate. But this is a strange result, defying common sense that common stocks are riskier than U.S. Treasuries.

We are back to where we started: Estimating appropriate discount rates for equity securities requires judgment about how much riskier a particular business is compared to risk-free benchmarks of U.S. Treasuries. Modern finance theory assumes return is correlated to risk (you get what you pay for); value investing understands return as correlated to effort (you get what you deserve).



Also read:

1. Understanding Discount Rates
2. Risk-free rate
3. Traditional Method: Discount rate or WACC (I)
4. Traditional Method: Discount rate or WACC (II)
5. Modern Portfolio Theory
6. Portfolio Theory: Market Risk Premiums
7. Portfolio Theory: Beta
8. Is the market efficient, always?
9. Discount Rate Determinations: Summary

Lessons from a Very Bad Year

Lessons from a Very Bad Year
by Ben Stein
Posted on Monday, December 22, 2008, 12:00AM

At last, this horrible year is almost behind us. Let's hope we never see another one like it.
If someone had told me that the market -- adjusted for inflation -- would be down by more than it was in the Great Depression while most Americans still basically had high prosperity, I wouldn't have believed it possible. It goes to show what stupendously bad Treasury stewardship can do.
If someone had told me Treasury and the Fed would allow the fourth- or fifth-biggest investment bank in America to fail, I would've scoffed. But they did it, and we got a stock market crash, a severe recession, and national fear as the result. The night Paulson and Bernanke let Lehman fail was the night they drove old American investors down.
Theoretical Failings
Meanwhile, we look to the future. And we try to learn from the past. What have we learned?
1. Efficient market theory is extremely limited as a market predictor in times like these. Efficient market theory says that at any given moment, the market price of all stocks reflects all that is known about them -- the price at any given moment is the best estimate of future price.
This is true as far as it goes. And, again, in most times, it goes very far. But in times when what is not known lurks below the waterline like the bottom of an iceberg, dwarfing what lies above and can be seen, efficient market theory is not only limited in effectiveness but downright dangerous.
It turned out that what lay waiting unknown to most of us -- and to the market -- was a wild miscalculation about the true liabilities associated with credit in this country. The true liability on subprime included staggering amounts of derivatives, a high multiple of subprime itself. Ditto for credit card debt, and now, as we're seeing, ditto for commercial mortgage debt.
Not only was that debt questionable, but players had added super-sized bets so big that the markets simply couldn't adjust to them without a serious correction.
Mr. Market Gets It Wrong
So efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts. Some are right and some are wrong, and they're usually not even close to being as helpful as Mr. Market.
But as my pal Jim Grant notes in his masterful new book, "Mr. Market Miscalculates: The Bubble Years and Beyond," the market is far from infallible and can lead the investor to disaster. Efficient market theory is highly fallible, but it may still be better than anything else.
Bye-Bye, Buy and Hold?
Another lesson to be drawn from this year:
2. Buy and hold as a strategy is very questionable, as my pal Robert Lobban says. It's worked in the past, but in times of severe market stress it just doesn't work. We've now gone 10 years -- many of which were banner years for profits -- without a gain in the broad indices. In some areas, such as REITs and commodities and energy and autos, the losses have been breathtaking.
But trading doesn't work well for most investors either. Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months.
So, what's the solution? Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds.
My pal, Phil DeMuth, along with many others, has long said that investors should have half in bonds. He's right, but even bonds, except for Treasuries, have been whacked this year. But his approach is definitely the right one. Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement. This turns out to be a simply brilliant suggestion. Ray has a lot of them.
What we're left with is maybe that buy and hold is far from perfect, but if we have enough cash to get us through the bad times we might yet see it work. If not, one hardly knows what to suggest.
Historical Ignorance
The final lesson from 2008:
3. We can't count on the people who rule us to have learned a darned thing from past history. "Those who do not know the past are condemned to repeat it," said the famous Harvard philosopher George Santayana.
Of course, that's a cliche by now and has been for decades. But it is true of Henry Paulson, our pitiful Secretary of the Treasury and, very, very sadly, of Ben Bernanke, our Fed chairman.
Paulson is simply an ignorant, bullying fraud. I never expected much from him. But Bernanke is a scholar, or so I thought, and should've known better than to destroy confidence by allowing Lehman to fail. That was a mistake that no real student of the Great Depression, as Bernanke is, should've made. I would never have thought it could happen, but it did.
It makes me wonder what other mistakes and foolishness our rulers have in mind, and it scares me plenty.
Only Human
In the meantime, please don't blame yourself for your losses. We all make mistakes, yours truly especially. My hat is off to those like Doug Kass who saw it all coming. My hat is not off to those who claimed afterward to have seen it coming. I have met so many people who tell me they sold out in October 2007 that I think I must be the only person left in this country with any stock. (That would make me by far the richest man on the planet, and I guarantee that I'm not.)
We're just human beings with human failings. Efficient market theory fooled us. Buy and hold fooled us. Trust in government fooled us. My own failings fooled me. Something else will fool us next time. As my grandmother used to say when her children made a mistake, "Don't worry, you'll do it again." If we learn even a little from what's happened, we're far ahead of Henry Paulson.
In that spirit, have a Merry Christmas, Happy Hanukkah, and Happy New Year.

http://finance.yahoo.com/expert/article/yourlife/130751;_ylt=AgK_TOlH.RnkvqbqB2UHhnO7YWsA

Stock markets discount everything

Wednesday November 19, 2008
Stock markets discount everything
Current prices reflect all potential returns and risks

A LOT of investors find it difficult to predict the stock market’s movement. They cannot understand why whenever the market is faced with a lot of bad news, instead of tumbling, it goes up.

Each time the market has a lot of good news and they feel that it is the right time to buy stocks, the market drops. As a result, investors always enter the market at the wrong time and end up buying stocks at higher prices and selling them at lower prices.

In this article, we will look at whether the current market prices are reflecting all the information, including the good and bad news.

According to Eugene Fama, a market is considered efficient if the current market prices reflect all available information.

In an efficient market, investors will not be able to make money from the information they own as all the potential returns or risks are already reflected in the stock prices.

If you are an efficient market believer, you will believe it is not possible to make money from whatever available information such as stock prices, trading volume, the company’s financial statement or any insider information.

The best price to purchase any stock will be the current price as it reflects all the potential returns and risks involved in the company.

Recently, the Dow Jones Industrial Average surged from a low of 8,175.77 on Oct 27 to a high of 9,625.28 on Nov 4, the day of the US presidential election.

Despite higher stock prices, not many investors dared enter the market as they were uncertain if Barack Obama could win the election.

Obama’s landslide victory led many investors to believe it was the right time to purchase stocks but the Dow tumbled 486 points to close at 9,139.27 the very next day after the presidential election.

Our local investors, who rushed in to purchase stocks in the belief that the US market would soar following Obama’s victory, were deeply disappointed as the market did not behave as predicted.

The main reason behind this phenomenon was because the positive news of Obama’s victory had already been reflected in stock prices.

As a result, when the actual incident happened, the market tumbled instead of surging. Besides, after the short-lived euphoria on the US election, the US stock market still needed to reflect the poor fundamentals of the US economy and the possible economic recession. Hence, whenever we intend to take position on any positive or negative news, we need to determine whether that information is already reflected in the stock prices.

On Monday, even though the official data showed that Japan had slipped into recession, Japanese stocks shrugged off the news by closing higher.

Most investors could not understand why Japan’s stock market could close higher on such big negative news. Again, the main reason for this was the news on possible recession had already been reflected in Japanese stock prices.

In fact, some traders or investors might have over-reacted to the economic recession. Hence, when the Japanese government announced the actual numbers, investors reacted positively to the numbers as not being as bad as what they had predicted.

Since August 2007, markets in the Asia-Pacific have experienced several waves of massive selling. Each time the Asia-Pacific and European markets tumbled by more than 5%, raising investor concern over further crashes on the overnight US market, in most instances, the Dow would close higher as most of the negative news had been reflected in the stock prices.

Hence, we should not be too pessimistic whenever we encounter a lot of negative news. We need to sit back and think whether this negative news has been reflected in the stock prices.

Sometimes it may be the right time to purchase instead of selling stocks. In most instances, as a result of our panic selling, some investors end up regretting they sold the stocks too early. If they had more patience and had waited for a few days, they might have been able to sell at higher prices.

In conclusion, whenever we receive any positive or negative news, whether we are able to take advantage of it will very much depend on whether the information has been reflected in the stock prices.

If the stock prices have reacted to the news prior to the announcement, investors will not be able to benefit from the information.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2008/11/19/business/2580026&sec=business

Irrationality of the Efficient Market Hypothesis

Buffett gratefully acknowledges the irrationality of the efficient market hypothesis:

".....these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore, calculations of business value - and even thought itself - were of no importance in investment activities. We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection - than to have opponents who have been taught that thinking is a waste of energy? .. it's like telling a bridge player that it doesn't do any good to look at the cards."

------

Although business performance is likely to be far from fixed or stable, most listed companies have an average price variation in the course of a 12-month period of about 40 to 50 percent (meaning that the difference between the 12-month high and low prices is about 40 to 50 percent of the low price). One would need to be exceedingly credulous to believe that, on average, the value of a business varies by 40 to 50 per cent every 12 months.

When a stock market falls 10 per cent or more overnight, does this mean that the value of all businesses comprising the market decclines by an average of 10 per cent while we sleep? When the Australian market fell 50 per cent in 51 days in 1987, was market pricing correct both before and after prices declined?

--------

However, one should not assume that the market is always wrong. In fairness to believers in EMH, it should be acknowledged that mispricing also results from

• accounting fraud,
• profit misrepresentation,
• a company's false or incorrect profit projections and
• recommendations of analysts that on occasion have been shown to be intentionally fraudulent.