Can you explain the concept of the Efficient Market Hypothesis?

Question

F FitnessFreak741 on 08.02.2024 Posts: 65

So, I've been trying to wrap my head around this whole Efficient Market Hypothesis thing. Like, what's the gist of it? Does it basically mean that all the info out there about stocks or whatever is already baked into the prices, so there's no point in tryna outsmart the market? Just kinda curious if this is why some folks say you can't beat the market, or if there's more to it? Would appreciate any insights y'all might have. Cheers!

Trading-Setup.com - Empower your Trades! · Accepted Answer

The Efficient Market Hypothesis suggests that stock prices reflect all available information and thus are valued fairly.
It posits that it's impossible to consistently achieve higher returns than the overall market because price changes are unpredictable and not tied to past trends.
There are three forms of EMH—weak, semi-strong, and strong—each assuming a different level of market efficiency and information dissemination.

P PetPal456 on 24.02.2024 Posts: 62 · Accepted Answer

Absolutely, the Efficient Market Hypothesis (EMH) is a pretty interesting concept and you've got the initial idea spot on. According to EMH, it's believed that stocks are always fairly valued because all available information is already reflected in the price. This means that any new data or news about a company's performance or potential is almost instantly absorbed by the market and translated into the stock's price.

Now, because of this, EMH suggests it's pretty much impossible to consistently score higher profits than the average market return, since you can't access information that the market hasn't already considered. This is also why passive index investing has become popular, as it's based on the idea that keeping pace with the market over time is a more reliable approach than trying to outperform it.

However, critics of EMH argue that the market isn't perfectly efficient and that there are opportunities to outperform the market by identifying undervalued stocks or by taking advantage of market irrationality. These folks believe that through in-depth analysis, patience, and a bit of luck, one can beat the market averages.

What's crucial to consider is your investment strategy and risk tolerance. If you're intrigued by the challenge and have the time and resources to research, you might explore strategic investing. On the other hand, if you prefer a more hands-off approach, then sticking with the wisdom of EMH and investing in broad index funds could be your best bet.

What's your take on it? Do you reckon the markets are truly efficient, or do you believe there's room to outmaneuver the averages with some smart investing?