Paul Samuelson

Paul Anthony Samuelson (1915-2009) was one of the most influential economists of the 20th century. A professor at the Massachusetts Institute of Technology (MIT) for most of his career, he was the first American to be awarded the Nobel Memorial Prize in Economic Sciences in 1970 for his work in raising the analytical and scientific level of economic theory. His landmark textbook, Economics, first published in 1948, introduced millions of students worldwide to the core principles of the field. For investors, Samuelson is best known as a key architect and proponent of the Efficient Market Hypothesis (EMH). This theory argues that asset prices, like stocks, fully reflect all available information at any given moment. The radical implication? It's impossible for an investor to consistently “beat the market” because there are no undervalued stocks to find. Any new information is almost instantly baked into the price. This view stands in stark contrast to the philosophy of Value Investing, setting the stage for one of the great intellectual debates in modern finance.

Samuelson was known for his sharp wit and skepticism of Wall Street's self-proclaimed gurus. He famously quipped that stock forecasters “can make a living, but they can't make you a living.” This skepticism was rooted in his mathematical analysis of market behavior, which lent academic credibility to the Random Walk Theory. This theory suggests that future stock price movements are unpredictable and independent of past movements. Imagine a drunkard staggering down a street; his next step is just as likely to be left as it is right, regardless of his previous steps. Samuelson argued that the stock market behaves similarly. The price of a stock tomorrow is a “random walk” away from its price today. Why? Because the market is so efficient at processing information. The current price is the best estimate of a company's value, and the only thing that will change it is new, unpredictable information (a surprise earnings report, a new competitor, a political event). Since new information is by its nature random, so are the price changes. For a follower of Samuelson, this means that poring over charts (technical analysis) or financial statements (fundamental analysis) to find bargains is a waste of time. The market, as a collective, has already done that work for you.

The ideas championed by Paul Samuelson created a major dividing line in the investment world, a philosophical split that persists to this day.

Samuelson's camp believes the collective judgment of millions of investors creates a highly efficient pricing machine.

• Information is Key: All public knowledge is reflected in the stock price almost instantly.
• Success is Luck: Investors who consistently beat the market, like Warren Buffett, are seen not as skillful, but as statistical anomalies—the lucky winners in a giant coin-flipping contest. If enough people flip coins, someone is bound to get ten heads in a row.
• The Best Strategy: Don't try to find the needle in the haystack. Instead, buy the whole haystack. For the average person, the most rational approach is to invest in a broad, diversified, low-cost Index Fund that simply mimics the market's overall performance.

Value investors, following in the footsteps of Benjamin Graham, see things very differently. They believe the market is far from perfectly rational.

• Emotion is Key: The market is often driven by human emotions like fear and greed, causing it to swing between irrational exuberance and unjustified pessimism. Graham's famous allegory of “Mr. Market” depicts the market as a manic-depressive business partner who offers to sell you shares at wildly different prices depending on his mood.
• Success is Skill: Beating the market is not about luck; it's about discipline and hard work. It involves calculating a company's intrinsic value and patiently waiting for Mr. Market to offer a price well below that value (a “margin of safety”).
• The Best Strategy: Ignore the market's “noise” and focus on the underlying business. As Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”

So, who was right? The truth is, Paul Samuelson's work provides an invaluable lesson for every investor. He correctly identified that for most people, trying to outsmart the market by day trading, chasing hot tips, or paying high fees to underperforming fund managers is a losing game. His advocacy for low-cost index funds created a fantastic, simple, and effective option for passive wealth building. However, for the dedicated value investor, Samuelson's theory is not a rule to be obeyed but an opportunity to be exploited. The very fact that pockets of inefficiency exist is what allows a disciplined investor to find bargains. Ironically, if everyone truly believed in the Efficient Market Hypothesis and stopped doing research, the market would become less efficient, creating even more opportunities for those who still do the work. Your strategy can be a blend of both worlds. Using index funds as the core of your portfolio is a sound, Samuelson-approved approach. But understanding that the market isn't always rational allows you to keep your eyes open for the rare, wonderful opportunities that Mr. Market occasionally offers up. You can respect Samuelson's logic while still aiming to prove him wrong, one carefully researched investment at a time.