Overview

Among financial professionals, there are a group of people who adhere to a set of beliefs about how the financial markets operate. This set of beliefs guide their decision on what to invest in and when to invest in them. This set of beliefs is called the 'Efficient Market Hypothesis' (EMH).

At its core, followers of EMH believe that the markets price every stock, bond and every other investment to perfection. In other words, no stock or bond is ever undervalued or overvalued, but priced just right. This removes any opportunity for someone to generate better risk-adjusted returns than the market by picking and choosing undervalued investments.

But while I understand and respect their beliefs, I must simply disagree. I believe that following EMH can potentially rob people of significant potential returns on investments.

This page is meant to act as a comprehensive guide that explains what EMH is, why people believe in them, why it's wrong, and what the consequences are of believing in them. I've tried my best to keep the discussion understandable by using plain language.

Please understand that the purpose of this page isn't to bash those who believe in EMH. I know of EMH followers who are smart and full of integrity.

- Dr. Jin Choi

Articles

What Is Efficient Market Hypothesis?

In addition to explaining what EMH is, this articles explains which group of people tends to believe in EMH and why.

The Consequences Of Believing In Efficient Market Hypothesis

We examine the reasons why people believe in EMH, and we discuss the ways in which believing in EMH might affect the way they invest their savings.

Reason #1 Why Markets Are Not Efficient: People Don't Research

EMH assumes that when people invest, they do so only after they carefully read and correctly process every single data relating to the investment. We argue against this idea.

Reason #2 Why Markets Are Not Efficient: People Are Emotional

EMH can only work if investors act dispassionately - i.e. disregard hype, overconfidence, fear and any other emotion in favour of cold, hard logic. We argue that humans don't really behave this way.

Reason #3 Why Markets Are Not Efficient: Too Much Focus On Short Term

Short term goals are often at odds with long term goals. We explain how this combines with the previous two reasons to worsen inefficiencies in the financial markets.

How The Popularity Of Efficient Market Hypothesis Benefits Value Investors

EMH is becoming more popular among today, so we examine the consequences of such increased popularity. We also mention the shifting attitude of academia from EMH.

Conclusions

Circumstances change.

Assets that are cheap are expensive tomorrow. Risks that didn't merit attention before demands attention now.

In the year 2000, stocks were expensive but long term bonds were cheap. A decade later as investor sentiment turned, stocks became cheap and long term bonds became expensive. But unfortunately, believing in EMH leads one to invest in the same portfolio regardless of market conditions.

We here at MoneyGeek believe in a different philosophy altogether - a philosophy that calls for rational, long term analysis of risks and returns. This philosophy is called Value Investing.

Like EMH believers, value investors believe in keeping costs down by trading infrequently. Like EMH believers, value investors believe in investing for the long term.

However, whereas EMH believers rely on other investors to price investments rationally, value investors rely on our own analysis. Recognizing that the world changes, value investors change our portfolios - slowly but surely - to position it for better growth.

This value investing philosophy pervades everything we do. It guides all of our writing, and it guides how we recommend investing for the future.

If you agree that the markets are not always right and if you desire to invest your savings better, I believe you'll find this site worthwhile.

On our blog, we discuss other topics that serve to broaden your knowledge about investments. To receive regular updates on new articles, sign up using your email below.

Further Reading

How Did Economists Get It So Wrong?

In addition to a Nobel Prize, Paul Krugman has three distinctions that sets him apart from most other economists. He's the favourite living economist among 299 economic professors polled. He's also the most accurate prognosticator among 26 famous pundits. Finally, he's considered the most influential economist of our day according to the Wall Street Journal.

In the article, Krugman argues against EMH, and blames it for playing a significant role in causing the financial crisis in 2008.

The Superinvestors Of Graham-and-Doddsville

Warren Buffett is considered the greatest investor alive today among Wall Street professionals. Studies have shown that Buffett possesses the best investing record among all stocks and mutual funds for the past 30 years.

In this article, Buffett eloquently explains why EMH is wrong, and he also argues in favour of value investing.

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