Q1. Marcus Padley, a stockbroker, made the following statements in an article in the Sydney Morning Herald.

I love The Warren Buffet Way. In fact, one of my first clients introduced himself by saying, I am Fred and Id like to invest the Warren Buffet Way. Well whoopee do! What shall we do? Get the annual reports of the top 200 companies. Analyse the accounts of each, assess value and then go to the stock market and find out that wow, Im right and the whole market is wrong and the share price is trading below the true value. Then purchase the shares and wait for that value to inevitably emerge.

In fact, most Warren Buffett-based approaches are terrible at timing, which in reality is about the only thing that really matters. In an increasingly impatient market, it is not just about what, it is becoming all about when. Investors who sat through the 54.5per cent fall in the market in the financial crises need to earn 113% to get their money back. Thats 13 years of compounding average annual returns. Not caring about when just cost us 13 years.

Critically evaluate the two statements made by Marcus Padley in the context of capital market research.

ANSWER GUIDE BELOW-

First statement:

EMH(Efficient Market Hypothesis) says that share prices reflect all available information

Accounts in the annual reports are based on accounting principles which do not capture all the information relevant to share prices

Earnings management may distort the accounts

Second statement:

Focus on behavioural finance investors do not sell early enough