What was Benjamin Graham's view on the Efficient Market Hypothesis?

Okay, let's discuss this classic topic.

Graham vs. Market Efficiency Theory: A Classic Showdown

Simply put, Benjamin Graham did not believe at all that the market was perfectly efficient. His entire investing philosophy, known today as "value investing," is built on the foundation that "Mr. Market" makes mistakes.

To help you understand better, let's break down these two concepts separately. You'll see why they are fundamentally opposed.

First, what is the "Efficient Market Hypothesis"? (The Academic View)

Think of this theory as a "perfect information processor."

It holds that the stock market is remarkably smart; it quickly incorporates all publicly available information (like company earnings reports, industry news, macroeconomic data, etc.) into stock prices.

If a company reports good news? The stock price instantly rises to the level it "should" be at.
If a company reports bad news? The stock price instantly falls to the level it "should" be at.

The conclusion: It's virtually impossible to find "bargains" or "undervalued" stocks. Because stock prices are always "fair" at any given moment, eliminating the concepts of "undervaluation" or "overvaluation." Trying to consistently outperform the market through analysis and research is largely futile. It's like trying to find a bargain in a supermarket where every item has a fixed price tag and nothing is ever discounted.

Next, what does Graham's "Mr. Market" say? (The Practitioner's View)

Graham rejected the idea that the market was such a rational machine. Instead, he used a very vivid metaphor – Mr. Market.

Imagine you have a business partner named Mr. Market. Every day, he comes to you and offers to quote you a price for the shares you hold. You can choose to sell your shares to him or buy more shares from him.

But this Mr. Market has a problem: he is emotionally volatile, a manic depressive.

When he is extremely optimistic and euphoric (a bull market): He quotes ridiculously high prices, as if your company is the greatest enterprise in the world.
When he is extremely pessimistic and dejected (a bear market): He quotes absurdly low prices, as if your company is going bankrupt tomorrow.

The crucial point is: You are entirely free to ignore him!

As a smart investor, your job isn't to be swayed by his mood swings but to exploit them.

When he's pessimistic and despairing, quoting bargain-basement prices, that's your chance to buy.
When he's wildly enthusiastic, quoting sky-high prices, that's your chance to sell.
If he quotes a reasonable, lukewarm price, just keep holding—do nothing.

Conclusion: Graham's Verdict

By now, it should be crystal clear.

For Graham, that rational, perfect, never-wrong market described by the efficient market theory simply doesn't exist in reality. The real market is that emotional Mr. Market.

Graham's entire system of value investing, including:

Margin of Safety: Buying stocks at prices far below their intrinsic value (e.g., buying something worth $1 for 60 cents).
Intrinsic Value Analysis: Determining how much a company is truly "worth" through deep research into financial statements.

The crucial reason these methods can succeed is the premise that market sentiment causes stock prices to deviate significantly from their true value. If the market were always efficient and prices always equaled value, the whole concept of a "margin of safety" would be meaningless.

Summarizing Graham's core beliefs:

The market is a voting machine in the short run: Driven by emotion, rumors, and speculation. Prices fluctuate wildly and are frequently wrong. This is Mr. Market in his manic or depressive states.
The market is a weighing machine in the long run: Ultimately, a company's true value (like its earnings power and asset strength) determines its stock price trajectory. Price tends to return to intrinsic value.
The intelligent investor's job is: To exploit the market's short-term mistakes, buying when the price is far below value, then patiently waiting for the market to regain its rationality and for value to be realized.

So, if Graham were to sit down for coffee with the economists who proposed market efficiency, he would probably smile and say: "Your theory is elegant, but my friend Mr. Market demonstrates with his actions every single day that you are wrong."