Dollars and Jens
Friday, March 05, 2004
Market Efficiency
Last weekend, I was driving down to Brockton with a nearly-empty gas tank. I had hoped to make it all the way to Brockton before filling up, but with about 15 miles to go, the gas gauge was making me nervous, so I decided to stop at Braintree. The gas price was $1.759. This seemed high to me, so I only got two gallons. About forty minutes later, leaving Braintree, I filled the tank at $1.589.

Efficiency problems in the stock market are usually different from efficiency problems in the gasoline market -- you'll never find one person selling Cisco at $60/share and an other selling at $50. Inefficiencies are generally probabilistic; I thought it was unreasonable to believe, four years ago, that Yahoo was worth more than Berkshire Hathaway, but I'm sure someone had a (very bad) prediction of cash flows which justified it. I guess my point in telling this story is just that, while the market price of something is usually one of the best estimators of its value, it's not always spot on.

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