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[From The Archives] Martin Whitman On The Efficient Market

Martin Whitman is a legendary value investor and founder of Third Avenue Management.

Over the years, Martin Whitman has gained a reputation for his contrarian investment strategy and devotion to the school of value investing. For more than 50 years, Martin Whitman has shown that active management strategies with a value slant can outperform the market.

Martin Whitman founded the predecessor to the Third Avenue Funds in 1986 and managed the flagship Third Avenue Value Fund since inception in 1990 through March 1, 2012. He was Third Avenue’s Chief Investment Officer from its founding through January 2010. From inception in November 1990 through October 2007, his fund has returned an annualized average of 16.83%. In the same period, the S&P 500 index returned an average 12.33% annually.

And throughout the years he was running the Third Avenue Value Fund, Martin Whitman's quarterly letters to investors became an invaluable source of information for investors. In one such letter, sent out to investors at the end January 2001, Martin explored his take on the academic efficient market theory, and why he believed markets tended towards efficiency, but few markets ever achieve instantaneous efficiency.

Martin Whitman: The efficient market

"Starting in the 1960’s the theories embodied in Academic Finance which revolve around the study of security prices, have taken over security analysis rather completely. The quants rule the roost; Graham and Dodd is mostly dead except for the small minority of outside investors who have a Third Avenue type of approach." -- Martin Whitman January 2001 letter to investors.

This statement, made at the beginning of 2001 is still true today. Whitman goes on to say that most common stock investment at the time followed academic precepts. Most investment styles used passive investors were (and still are) based on the academic theories of the Efficient Market Hypothesis (“EMH”) and Efficient Portfolio Theory (“EPT”). These academic theories are the basis of ideas such as indexing, asset allocation, top down strategies, diversification and the process of defining value through DCF calculations.

Martin Whitman goes on to note that the bedrock of academic finance is the assumption embodied in EMH that the market is efficient. However:

"TAVF has a markedly different view of efficiency than the...