Efficient Market Hypothesis - EMH
Categories: Financial Theory, Investing
The theory says that you can't beat Mr. Market, because all information is already reflected in the stock price—that markets are, in fact, efficient and that new information pukes out into the marketplace like a burp in a small room.
Think you can beat the market because you have some great information? Sorry, champ, but this theory claims that the information is already affecting the market...because others know the info, too. Better luck next time.
There are three models of the efficient market theory: the weak form model, the semi-strong form model, and the strong form model.
In the weak form model, past information about a stock isn't useful at all. The theory is that the current market value is the correct and best reflection of the value of the stock.
In the semi-strong form model, new public information about a stock is instantly reflected in the price, so you can't gain an advantage by using public information.
In the strong form model, even insider information is said to already be reflected in the market price.
Not everyone agrees with efficient market theory. They may point out that insiders can (and do) earn higher-than-average returns from trading their companies' stock. They might also point out that Warren Buffet has not only beat Mr. Market, but has reduced him to a bloody pulp.
Related or Semi-related Video
Finance: What is Efficient Markets Theor...141 Views
Finance a la shmoop what is the efficient markets theory well
there should just be a big picture of Warren Buffett right here it should be [Two men carrying a framed picture of Warren Buffett]
the man Warren explaining the efficient market theory himself and that theory
states that it's impossible to beat the market over a sustained period of time
it should be Warren Buffett who explains that all relevant information comes [Warren Buffett giving a presentation on stage]
public in public stocks and that the market more or less immediately
incorporates all that information in its pricing
hence nobody can ever beat the market over a long period of time so why should [Men falling asleep during a presentation]
Warren Buffett be giving this little definition because the efficient market
theory is wrong Buffett has beaten the market for decades in a row in every way [Warren Buffett beating up the market with a stick]
shape and form so you have a really memorable huge figure in finance this
guy and then pipsqueak professors who are kind of a laughing stock whenever the [Professor jumping on the microphone stand trying to talk]
wealthy power crowds gather in Omaha for their National Convention that's what
they say at the Woodstock of Finance if you will fortunately most people keep [Man with arms folded standing naked in a corridor]
their clothes on for this one