In his 1985 Berkshire Hathaway Letter, Warren Buffett discussed how misguided academic teachings benefit strategic investors. In the early 1970s, successful investing was based on the philosophy of Ben Graham, which emphasized buying shares in solid businesses when their market prices were significantly below their true business values.

This approach contrasted sharply with the prevailing attitude among most institutional investors at the time, who largely ignored business value in their trading decisions.

This disregard for business value was influenced by academic theories from prestigious business schools, which promoted the belief that the stock market was completely efficient, rendering the evaluation of a company’s intrinsic value unnecessary and even irrational.

These theories provided a competitive edge to investors like Buffett and Graham, as they faced competitors who underestimated the importance of thoughtful analysis in investment decisions.

Here’s an excerpt from the letter:

Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.

Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell.

This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value—and even thought, itself—were of no importance in investment activities.

(We are enormously indebted to those academics: what could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)

You can read the entire letter here:

Berkshire Hathaway 1985 Letter