Savannah Sunrise: Financial Pursuit
Evaluating Pomp’s “ten hard truths” with our scorecard
Last week we took you through one of Pomp’s tweets where he denounced the concept of intrinsic value. Today, we have even more material to work with. These are, in Pomp’s words, the “10 hard truths.”
It’s dangerous to characterize something as a hard truth unless you are absolutely certain that is the case based on logic, common sense, history and context. Sure, it is great fodder for an X post that gives the cheerleaders an opportunity to validate you. At the same time, this type of behavior is downright dangerous when there are also many people looking for reasoned guidance and direction.
So, we are dedicating today’s post to Pomp again. We are treating his “10 hard truths” like a finance exam and will be grading him. Each true statement is worth one point and if the statement is a myth it is zero points. Partial credit is available for statements that have some element of truth to them. In the end, there will be a possibility of 10 points. Can you guess how well he scored?
Let’s tackle these “10 hard truths” one by one, shall we?
1. The efficient market hypothesis was wrong.
The efficient market hypothesis is the theory that asset prices reflect all available information. That said, it isn't easy to fully assess this statement because Pomp did not tell us why he thinks it was wrong. Absent an explanation, we’ll take the statement at its face value and interpret it to mean that stock prices don’t always reflect fundamental value.
If so, we don’t disagree with this one. The goal of investing is to find assets where price is significantly less than value. To the extent the efficient market hypothesis means all prices reflect true value at all times, there wouldn’t be such opportunities and therefore there would be no investing.
Warren Buffett, of course, famously denounced the efficient market hypothesis:
One advantage of our publicly-traded segment is that– episodically– it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
As early as 1988, he put his finger on exactly where the hypothesis has gone wrong:
This doctrine became highly fashionable - indeed, almost holy scripture in academic circles during the 1970s. Essentially, it said that analyzing stocks was useless because all public information about them was appropriately reflected in their prices. In other words, the market always knew everything. As a corollary, the professors who taught EMT said that someone throwing darts at the stock tables could select a stock portfolio having prospects just as good as one selected by the brightest, most hard-working security analyst. Amazingly, EMT was embraced not only by academics, but by many investment professionals and corporate managers as well. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.
How eloquent! Buffett is making the subtle point that investors will naturally take advantage of price-value gaps, that’s what they do; however, those advantages erode rather quickly. This beautiful quote comes to mind:
Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn't matter whether you're the lion or a gazelle-when the sun comes up, you'd better be running.
So if you go to the Serengeti and don’t see an abundance of slow gazelles running around, that doesn’t mean they do not exist! It likely means they were already eaten by lions. It’s not easy for a lion to easily find a slow gazelle waiting to be eaten but that’s precisely because many other lions perfectly satisfied their hunger along the process. The markets work exactly the same way.
What if most lions believe that there are no slow gazelles at all? They stop trying. This is what happened in finance, according to Buffett:
In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp. Buffett Partnership, and Berkshire illustrates just how foolish EMT is.
He continues:
Naturally the disservice done students and gullible investment professionals who have swallowed EMT has been an extraordinary service to us and other followers of Graham. In any sort of a contest - financial, mental, or physical - it’s an enormous advantage to have opponents who have been taught that it’s useless to even try. From a selfish point of view, Grahamites should probably endow chairs to ensure the perpetual teaching of EMT.
We’ll give Pomp close to full credit here because he is rightfully challenging the conventional wisdom here. The partial reduction in points is mainly because he later contradicts this first “hard truth” with his sixth statement.
Score: 0.75 points
2. There is no such thing as intrinsic value. All value is subjective and relative.
We discussed intrinsic value extensively last week, so no need to rehash it. This must be one of the worst takes in the history of finance. Pomp’s mistake was summarized quite nicely by this poster:
Simply put, imprecise estimates don’t imply non-existence. It is difficult to be charitable to Pomp on his clearly mistaken view.
Score: 0 points
3. Stock market growth is based on currency debasement, not earnings growth.
This is a fancy way of saying that the stock market returns are an illusion because they are fully eaten away by inflation. In other words, what the investor gains in the stock market doesn’t improve the quality of his life; his real purchasing power has not changed, he is just keeping pace with inflation. Do you really feel that this is a true statement?
Below is a YouTube clip of Tad Smith, President/CEO of Sotheby’s and Adjunct Professor at Stern School of Business (NYU) who is making the exact same observations as Pomp (this video often gets circulated on X as well, Bitcoin maxis love it):
Just because these statements are coming from someone who taught finance for 25 years doesn’t automatically make them credible; one should still critically evaluate them. Fortunately, this thesis is easily debunked.
First things first. The consumer does not care about the money printer. The consumer cares about the inflation. Yes, of course the two are related, but economies are complex structures; the relationship is not one to one. The true test of how much of the S&P growth comes from currency debasement vs. earnings growth necessitates comparing the S&P returns against inflation.
Luckily, we have already done the math for you in our Tuesday's post last week:
To put that in context, if you invested $1,000 in Berkshire in 1964, it would be worth $55 million today. That same $1,000 invested in the S&P 500 would be worth $390,540.
What about inflation? $100 in 1964 (as of January 1, 1964) is equivalent to $1021.38 (as of December 31, 2024) according to this calculator. So, inflation, which was slightly under 4% (on average) since 1964, was responsible for 10x. The S&P was 390x on top of that and Berkshire’s return was 140x of the S&P. That’s the power of compounding for you. 10.4% vs 4% matters significantly over the long haul. Similarly, 19.9% over 10.4% matters considerably as well. The S&P outpaced inflation by a wide margin and Buffett outpaced the S&P by even more.
In his 1988 letter, Buffett gives a similar example evaluating Ben Graham’s track record:
While at Graham-Newman, I made a study of its earnings from arbitrage during the entire 1926-1956 lifespan of the company. Unleveraged returns averaged 20% per year.
And:
Starting in 1956, I applied Ben Graham’s arbitrage principles, first at Buffett Partnership and then Berkshire. Though I’ve not made an exact calculation, I have done enough work to know that the 1956-1988 returns averaged well over 20%. (Of course, I operated in an environment far more favorable than Ben’s; he had 1929-1932 to contend with.)
How does all of that compare to the market?
Over the 63 years, the general market delivered just under a 10% annual return, including dividends. That means $1,000 would have grown to $405,000 if all income had been reinvested. A 20% rate of return, however, would have produced $97 million. That strikes us as a statistically-significant differential that might, conceivably, arouse one’s curiosity.
It's true that some of the S&P 500's returns can be attributed to currency debasement, but that observation alone doesn’t paint the full picture. It’s like saying the Timberwolves beat the Thunder in Game 3 of the Western Conference Finals simply because Terrence Shannon Jr. outscored MVP Shai Gilgeous-Alexander. While technically correct, the real reason for the Wolves’ victory was Anthony Edwards delivering a super-efficient 30/9/6 masterpiece that set the tone and effectively put the game away early. Similarly, while currency debasement does eat into some of the S&P returns, its impact is relatively minor in the grand scheme of things.
Keep in mind, this only reflects the returns of the index itself–dedicated investors often achieve even better returns. To the extent a small portion of the S&P returns are attributable to currency debasement, that only strengthens the case for investing. After all, the S&P 500 has consistently outpaced inflation by a comfortable margin. If you’re willing to put in the hard work–or entrust someone who does–then everything you earn beyond market returns is simply the cherry on the top.
In our view, Pomp completely missed the mark on this one. The data tells a different story, contradicting his claim outright. While we’ll give him a small nod for recognizing the importance of real returns, it's hardly enough to salvage the argument..
Score: 0.25 points
4. Saving lots of cash is a guaranteed way to lose money.
Pomp's point is vague—perhaps it’s another critique of currency debasement? Either way, it oversimplifies a complex financial decision.
At its core, there are two key decisions nested within this discussion. The first is the fundamental choice between saving and spending. Whether you are a 13-year old deciding what to do with your allowance or a new hire managing your first paycheck, the question remains: how much you spend vs. save. Life isn’t about accumulating the biggest bank balance–it’s about maximizing happiness. Being overly frugal can mean missing out on life experiences that can enrich your life. That said, balance is also crucial. What feels right and makes you happy today could leave your future self frustrated and wishing you had planned differently.
Once you commit to saving, the next step is deciding where to put your money. Hoarding cash in an non-interest bearing account, stuffed under a mattress, or in a savings account that earns a measly 0.05% interest rate guarantees inflation will eventually erode its value. However, maintaining some liquidity for emergencies prevents the need to borrow at unfavorable rates when unforeseen events arise, The rest of your savings, if invested wisely, can help you get ahead, see point #3 above.
In a nutshell, the problem isn’t the act of saving, it’s what you do with your money after you’ve saved it.
Score: 0.5 points
5. Bonds destroy your investment returns.
Another overly simplistic generalization by Pomp. The role of bonds in a portfolio is well-understood–with age, risk tolerance and market circumstances all influencing the exact role they should play. If you’ve just retired with a solid nest egg and your primary goal is preserving wealth, a bond-heavy portfolio can certainly make sense. When bond yields are rising–such as this last week–and the market appears overvalued–likely the case with current market conditions–allocating a meaningful portion to bonds can be a reasonable strategy. Conversely, if you are a recent college graduate investing in a post-recession market and confident in the long-term strength of the U.S. economy, bonds are unlikely to serve you well, stocks are likely the better investment.
The bottom line: Bonds have a time and place in a portfolio, and their ideal weighting is context-dependent. Declaring that bonds “destroy your investment returns” is misleading at best and irresponsible at worst.
Score: 0 points
We've examined the first five of Pomp’s "10 hard truths," separating sound financial principles from misleading generalizations. While some of his points hold some merit, others lack nuance and fail to account for key investing considerations. In our next post we will break down the second half of his list with the same level of sharp analysis and critical perspective, calculate his points and assign his final grade.
