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The stock market is obviously inefficient

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In 1963, a subsidiary of American Express (AmEx) gave out loans based on salad oil as collateral. It was revealed to AmEx (which had effectively guaranteed these loans) that the oil containers contained mostly seawater (with some oil floating on top!). The moment this news broke, the stock price of AmEx fell by 50%. In the midst of the scandal, a portfolio manager called Warren Buffett quietly bought 5% of AmEx stock. He sold the AmEx stock for much higher over the next five years for a handsome profit. What conclusion can we draw from this episode regarding the efficiency of the stock market?

1. The stock market is obviously inefficient, as Buffett could make money in this episode, which is not supposed to happen if markets were efficient

2. The market is largely efficient: the stock price reacted immediately to the "oil is really seawater" news, and recovered enough over the next five years for Buffett to make money

3. The stock market is inefficient as stock prices are not supposed to move so much over a single piece of news.

Reference no: EM133495927

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