A Comparative Analysis: Fama's and Buffett's Views on Finance

This essay provides an analysis of the contrasting views of Eugene Fama and Warren Buffett on market efficiency and investment strategies. It begins by introducing key concepts like market efficiency and behavioral finance, highlighting their importance in finance. The essay then delves into Fama's perspective, discussing his efficient market hypothesis and his skepticism towards active fund management, emphasizing the challenges of identifying skilled managers and the impact of government policies. Subsequently, the essay explores Buffett's views, contrasting his belief in market inefficiencies with Fama's hypothesis, and highlighting the role of fundamental analysis and value investing. The discussion includes real-world examples, such as Coca-Cola and Berkshire Hathaway, to illustrate the practical implications of each viewpoint. The analysis covers key points such as the impact of secondary stock distributions, market anomalies and the influence of economic crises, offering a comprehensive comparison of their perspectives on the financial market and its participants.

Analysis of Fama’s and Buffett’s Views 1
ANALYSIS OF FAMA’S AND BUFFETT’S VIEWS
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Analysis of Fama’s and Buffett’s Views 2
1. Introduction
Finance experts employ the concepts of marketing efficiency and behavioral finance
since they have a significant implication for the firm. Marketing efficiency is dependent on
the methodology of investment by an investor. In reference to the efficient market hypothesis,
an individual tending to invest in the stock market is termed by the level of rationality.
Rational stakeholders are obliged to monitor the utility functions that focused on the
performance and evaluation of high returns, including a rational prospect. On the other hand,
behavioral finance considers the study of market behavior evident in investors. These
behaviors are derived from psychological ethics defining the decision-making process in
business, which explain the reasons for purchasing and selling stocks. Moreover, this concept
is connected to the behavioral cognitive mindset that evaluates human decisions and
economic market finances. The two concepts (marketing efficiency and behavioral finance)
enable investors to consider and evaluate various investment conditions. Moreover, these
concepts allow firms to perceive investment as imaginary paradigms that assure ethics.
2. Discussion of Fama’s views
“After costs, only the top 3% of managers produce a return that indicates they have
sufficient skill to just cover their costs, which means that going forward, and despite
extraordinary past returns, even the top performers are expected to be only as good
as a low-cost passive index fund. The other 97% can be expected to do worse.”
Eugene Fama, Nobel Prize-winning academic
Fama’s comment signifies the relevance for investors to evaluate contemporary issues
of financial specialists. Eugene Fama considered reminding firms, as a form of modest
mathematics, to operate according to the rate of competition in the market. Moreover, the
analyst argues that financial crises are prompted by administrative and not financial

Analysis of Fama’s and Buffett’s Views 3
influences. Thirdly, analysts reasons concisely and honestly that inflation is approaching and
the Federal Reserve cannot control it (Adamauskas and Krušinskas, 2012). With the concern
of recruiting human stock-pickers, investors do not have the control of selecting managers
who can deliver the best returns. The performance of managers might be less (i.e. only 3% of
managers producing a return) and hence difficult to differentiate investment ‘luck’ from
actual skills.
A considerate number of highly-paid investment advisors and managers benefits more
financially from their skills when their performances are assessed. Fama’s views targets to
dismiss financial predicament as obligating lessened financial obligation from governmental
pressure meant to reassure the sub-prime mortgage financing. In this consideration,
recessions trigger mortgages to fail, hence leading to more pronounced financial pressure.
However, the worst aspect is an exit from the experience, which is an ideology of ‘too large
to fail’ (Joel and Putman, 2015). The critical issue of failing, whereby the other 97% can be
expected to do worse, permits large financial institutions to sell debts as a form of risk-free
asset. Resultantly, it makes it more convenient to expand and turn to be a considerable
financial issue (Branch, 2014).
For instance, when business managers deliberately ‘tank' their firms, Fama argues that
failing at an extensive rate to produce returns creates more room for financial risks in the
company. Approximately 25% of requirement in the capital, including an option to enhance it
significantly, might disregard any moral hazards that lead companies to realize more risks
(Fairchild, 2010). With the availability of high ratios in the capital, the analyst recommends
that debts are risk-free due to the availability of equity stakeholders who will invest their
finances before rendering the debt in risk.

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Eugene Fama bothers about open pensions, mentioning that managers need to report
of the expected discounting rates reflecting on future cost profits denoted as Treasury-
Inflation Safeguarded Securities which presently results to 0.17% for a decade (Pantelic,
2015). This is due to liabilities being equivalent to inflation and adjusted notes. Alternatively,
administrations discount prospect liabilities as 7% out of 8%, which is a targeted and high
return rate on every investment (Frazzini, Kabiller and Pedersen, 2018). This financial crisis
faced in the nations is to a large extent due to available pensions. Governmental constitutions
characteristically mention that the government needs to service its debts initially before
proceeding to pension expenditures. However, what is pending in literature is if the standard
will be implemented. Eventually, the affected state will be searching for the government for
bailing. This instance can be seen by Greece, which is considered to be on a larger scale.
Fama suggests to firms some fundamental inflation thoughts. Beginning in 2008,
when this aspect intervened in reference to Lehman Brothers Holdings Inc. downfall, the
analyst mentions that the Federal Research bought approximately $2.5 million realized as
overall debt-financed entirely by additional reserves in financial institutions. The financial
basis was approximately $150 million formerly before the Fed started purchasing (Pantelic,
2015). For this case, the Fed had continuously been disbursing interests on various reserves,
which are hypothetically meant to compensate financial institutions for ‘opportunity' funds
designated to maintain greater reserve stabilities at Fed. This is basically providing bonds to
purchase bonds, in addition to neutral as mentioned by Fama.
However, financial institutions can transform the reserves to currencies on demand
according to Fama’s opinions. This implies that the companies such as the Fed have possibly
eliminated its vital and efficient tools meant to control inflation, the monetary basis of
currencies and reserves (Văleanu, Cosma and Sofică, 2012). The financial basis ratio of about
$150 billion in reserve funds financed debts on Fed book signifies the pricing-level rise.

Analysis of Fama’s and Buffett’s Views 5
Economies principally do not operate effectively in hyper-inflations, which mean that the
actual government value debt is speculated to disappear; however, economies are speculated
to vanish with the funds. With this, balancing the budget is a resolution.
Another example is evident from the Coca-Cola Company. From the ideology of
market efficiency, the managers beating efficient market hypothesis (EMH) are executing the
forms of financial transactions being compared to them. For this reason, it is difficult to
compared moves such as bailing out the Coca-Cola Company to sell or purchase stocks
considering the market estimates derived by investors. EMH presumes that individuals cannot
influence the market performance unless feasibly shirt terms financial actions. As such,
bailing the company seemingly involves gaining more control to determine the company’s
future financial directions.
3. Discussion of Buffett’s views
“I’d be a bum on the street with a tin cup if markets were always efficient.”
Warren Buffett, Fund manager
The above Buffett’s view signifies that market efficient hypothesis is not an
empirically and well-illustrated refutable hypothesis. In order to make these operational,
firms need to specify the form of structure like data structure, investor preference and firms
conditions. Efficient marketing hypothesis is a testing framework of various auxiliary
hypotheses whereby rejections of this form of interlinked hypothesis inform firms about the
exact aspects on interlinked hypotheses is unpredictable with information (Bhootra and Hur,
2014). Buffett considers the question of whether stock prices are unpredictable due to
inefficiency evident in the market or risk levels, including payment smoothing. All the
mentioned three inferences reflect on financial data. Furthermore, novel statistical testing

Analysis of Fama’s and Buffett’s Views 6
frameworks are meant to differentiate the data, which necessitates auxiliary hypotheses meant
for questioning (Lucey, 2014).
Literature analyses of firm kinds of efficient marketing hypotheses may be classified
as testing of adjustment speed with prices to unique data provisions. The basic tool of
research in this field of study is the estimation of the average cumulative presentation of
available stocks according to a certain timeframe. This is denoted from a certain number of
timeframe periods earlier than an event to a particular period number thereafter. The
performance evaluation of every stock is detailed prior to the adjustment of the market-range
shift in security funds (Goovaerts, Van and Van 2014). Buffett’s view relates to the initial
event evaluation conducted by Fama in 1968. With the application of the marketing model
and assets to capital pricing framework considered as a benchmark, the event evaluation
provides firm evidence concerning share funds, including their reactions to income
announcement and stock splitting. In this case, the market segment seems to forestall data,
whereby the adjustments of prices are finished earlier than when the event is an
announcement to the market.
Immediately the information is released, the outstanding price corrections event
happens quickly and accurately. This event principally demonstrates that these funds reflect
on direct estimation of potential evaluation of a number of firms and data that necessitate
more delicate consideration. The evaluation and research on the effects of prices and
secondary delivery have a fundamental implication on stock pricing. In this instance, the
prices of stocks and movements are evident when sellers possess non-public data. Averagely,
share funds diminish by a significant amount, which reflects on the valuation of the fund's
data. The implication of secondary dissemination of prices of the stock is considerable
unaffected by transaction sizes that approves the market size depth and its sustainability of
stock security with another. Nonetheless, there are fundamental indications of events

Analysis of Fama’s and Buffett’s Views 7
thereafter following the drifting of stock prices that may comprise the violation of efficiency
in the market.
Despite the fact that it might be a lot of phases behind in suggesting the market efficiency
theory designated in any form of economic crisis, this rationale neglects the overall context
where the market dimension exists. The varying obligations of wide-ranged participants
might possibly encourage policymakers and regulators of funds to consider more attention to
what is really taking place outside the stock market. Financial crises caused a number of
prominent members of the Chicago institution to eliminate its basic tenets.
In this example of Richard Posner, which is targeted to turn into Keynes’ overall
employment theory, money interest, Posner considers from the failure of the institution to
comprehend the implication of financial crises, which is due to extensive modern financial
factor through the contrast of Keynes workings being mathematical. Moreover, being self-
regulated and embracing stock market power is another implication. The combination of the
two reasons makes it be very dangerous for firms to endure market pressure.
A real world example of market efficiency according to Buffett’s view arises if the
apparent stock market anomalies are reported to be globally known and disappear
subsequently. For example, it happened one moment when the stock included in an index
(S&P 500) for the first instance when there was an extensive boosting of the stock share
process. This was due to the funds becoming an index part and not any novel transitions in
the firm's fundamentals. This indexing influence anomaly converts to be known and reported
extensively that stock information increases and become efficient while anomalies are
diminished.
Companies of the world today use this ideology to study the market as evidenced
from the Berkshire Hathaway Company. The management of the company considers picking

Analysis of Fama’s and Buffett’s Views 8
the right stock carefully before purchasing them. These stocks are sold occasionally as the
global market changes. The prices of stocks characteristically decline after a recession and
the condition of the recession. This instance was a predominantly extensive recession.
According to Buffett, the prices of stocks began to diminish in advance when individuals
documented that is was actually a recession, hence fastening their choice to decline.
According to Buffet, this is what firms should expect when the stock markets were efficient
(Singh and Yerramilli, 2014). It will be convincing to assume that stock funds started to
decrease before investors realize what was actually happening. For instance, Lehman
Brothers Holdings Inc. prices of stocks decreased since individuals were not aware of the
firm's value of assets (Anda and Temmen, 2014). However, he proceeded to blame the
government and the relevant standards to Freddie Mac and Fannie Mar to purchase subprime
funds that are probably where it all began.
The stock market is considerably micro effective and macro ineffective as well. This
implies that individual variations of stocks are controlled by real novel data concerning
relative dividends. However, aggregate variations of the stock market are controlled by
bubbles. Today's markets indicate a fundamental micro-effectiveness (representing the
minority spotting aberrations off micro-effectiveness generating an income from various
occurrences. By doing this, it is possible to wipe off persistent ineffectiveness) (Muradoglu
and Harvey, 2012). In accordance with the previous statement, it had been hypothesized
considerably that macro inefficiency is a long-wave in a wide span aggregate reflection on
security funds above and below different critical definitions of stock values.
4. Conclusion on market efficiency and recommendations for the firm
In conclusion, the hypothesis market efficiency is a simple applicable principle. However, it
remains to be elusive. Developing from an earlier comprehensive collection of observations

Analysis of Fama’s and Buffett’s Views 9
on the randomized feature of security funds, it is possible paradigms in the financial sector
for more than three decades now. Efficient stock markets hypotheses have resultantly been
supported by the increasing sector are empirical study, which demonstrates the challenges in
defeating the existing market. It is recommended for firms to analyze data available
concerning the market and hiring competent investment experts. Evaluating the efficiency of
the market might be difficult, but possible with the right team of professionals. It is also
fundamental for companies to note that market efficiency hypothesis does not eliminate
minimal abnormal returns, before expenses and fees. This implies that financial analysts
could possibly benefit from incentives to act and acquire critical data; however, investors
might aim at receiving up-to average overall return.
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