Efficient Market Hypothesis is, essentially, a theory that beating the market is impossible.
According to EMH stocks and currency always trade at their fair value on exchanges and reflect all available information, making it impossible to make a profit from the markets or any trading strategy.
Under Efficient Market Hypothesis the only way to earn higher returns than those of an index, is to buy higher risk investments.
The Efficient Market Hypothesis (EMH) is highly controversial and often disputed as different people view different areas.
Efficient Market Hypothesis in 2 Easy Steps
What is Efficient Market Hypothesis
So the topic for this article is the Efficient Markets Hypothesis also known as EMH.
And this is the basic video before we move onto a more advanced video on the Efficient Markets Hypothesis.
It’s best if you already know the meaning of Fundamental Analysis and Technical Analysis also known as Chart Analysis as tools for predicting share and stock price movements.
Share and stock is the same thing. Some people say share price,some people say stock price. So make sure you know these 2 forms of stock price analysis before watching this video.
We will discusses the basics of Efficient Markets Hypothesis as well as the basic differences between Strong Market Efficiency, Semi-strong Market Efficiency and Weak Market Efficiency.
Initially these words sound pretty intimidating right now but don’t worry you will see how easy and simple actually is when you view the examples.
My next more advance video will still actuallybe super easy and you can find it in MBABullshit. com. And it simply and easily explains how stockand share prices move up and down in efficient markets depending on people’s expectations. Alright so now let’s get down to it to this basic video. First of all, it’s best to recall basic stock investing. Basic stock investing orbasic stock playing, or trading or whatever you want to call it or whatever type, they’renot exactly the same. But anyway, in basic stock investing, it’s a game of Good Newsversus Bad News. Now what do I mean by that? Well, it depends on sales reports. For example,it could be sales reports, income reports, any or profit reports you may want to callit. Anyway, what is this mean? It means that the Good News or Bad News regarding sales reports or profit reports are directly related to stock price. Basically, if the sales reports are good or the profit reports are good then the price of shares are supposed to in theorythe price of shares or stocks go up. But if the sales reports of a company are bad thenthe share price or the stock price of that same company should go down. How might people earn money using the news? Well, let’s just look at this story about greedy Bob and greedy Bill. Let’s say that Bob here is the CEO of a company and he seesthat latest company sales reports and he sees that the company is doing great. And let us say that this company that Bob works for is listed in the stock market. So Bob the CEOsees the latest company sales reports and he sees that his company is doing great. Whathe might do he does not announce this report to the public yet and instead he tells hisbuddy Bill about this great sales report before telling the public. Now what does Bill do?Bill buys the stock or buys the share of stock before the news announcement about this company’sgreat sales report. And then what happens? Bob then decides to announce it to the publicand after the news announcement, the share price goes up. And what happens to Bill? Billgets rich quick. Why? Because he bought the stock before the news announcement and thenthere was news announcement and then Bill share price went up. So Bill gets rich quick. So that’s one way people can earn money by trading the news. Basically this is the story about greedy Bob and Bill. What actually happened here? (1)Number one is Bob the CEO learns about the good news. (2) At first, he tells only hisbuddy Bill about the good news. (3) Bill buys the stock in advance. (4) And then Bob announcesthe good news to the public to people like your grandma, or very often we have this grandmainvestors who don’t know much about the inside information of the company about thesecret information of the company. And then it’s only after people like grandma hearabout the news that the stock price goes up. And then people like Bill over here get richquick. And grandma here did not get rich quick because she heard about this good news alreadyafter Bill made money on it. So in other words, people like grandma hear about the news toolate together with everyone else. So she’s not so happy over there. And you might saywhy she doesn’t earn money the stock price still went up. Well, in theory, remember thatin stock trading for you to win someone else has to lose because you buy the stock cheapor Bill here buy the stock cheap and then he sells it expensive. Who does he sell expensivetoo? Well, he sells it expensive to people like grandma after the price has already goneup. So in theory anyway, stock trading for you to win someone else must lose. And inthis case, Bill won against grandma. So in theory, Bill bought the stock when it wasstill low priced before the announcement and then sold it to grandma at a high price afterthe announcement. However this is actually what happens. This does not happen in what we called an efficient market. Another way of saying itis; we saw this bad situation over here but actually in a perfectly Efficient Market thatwould not happen, this bad thing that happened over here, this bad situation between Bill,Bob and grandma. This would not happen in a perfectly Efficient Market. Why? Becausein a perfectly Efficient Market; (1) there’s number one example there’s good news. (2)Number 2 even if Bob is the CEO, Bob, Bill and grandma all learn about the good newsat the same time even if Bob is CEO in a perfectly Efficient Market. Why is that? Because ina perfectly Efficient Market, the keyword here is perfectly efficient, all relevant information about the company such as the sales report flows or moves or travels instantlyor super quickly between Bob, Bill and grandma. So Bill does not have an advantage even if he’s the buddy of Bob which is the CEO. Now, in MBAbullshit language, in businessschool bullshit language, instead of saying perfectly Efficient Market, we usually sayStrong Market Efficiency.
So if you’re in business school, you’re wondering what does Strong Market Efficiency is that the textbook or your professor teach and talking about,they’re talking about a perfectly or almost perfectly Efficient Market like this situation over here where they all learn about the information at same time or almost the same time. What does this mean for investors? It means that in a perfectly Efficient Market withstrong market efficiency at any one time, anyone and everyone already knows all relevantinformation about a share or stock. So nobody can earn money by using any information suchas this sales report over here. Nobody can earn money using this information to analyseand predict the future share or stock price movements either up or down. So people likeBill cannot use the information to beat grandma. Why? Because grandma already knows the sameinformation too at the same time that Bill knows it. So it’s useless to use insideinformation. What is inside information? What’s the differencebetween information and inside information? Inside information just means the secret informationthat only Bill and Bob know. Grandma doesn’t know it yet. It’s secret, inside means likesecret information or advance information that Bob knows. But in a perfectly EfficientMarket with strong market efficiency, it is useless to use inside information, fundamentalanalysis or even technical analysis to give you or to give Bill an advantage in stockinvesting. Why? Because fundamental and technical analysis are based on information and sincethese two are based on information, how can these two give you an advantage if the information you’re using is already known by everyone. Remember in stock market investing, you havean advantage if you know about this information before other people know it. Therefore, Billalso does not have an advantage when he uses fundamental analysis which uses that informationand he also does not have an advantage when he uses technical analysis which also usesinformation or which is also based on information. debbierojonan Page 1