Efficient Market Hypothesis

Just like in everyday life, the share markets are driven by the decisions of people and it is by the virtue of their decisions that people make or loose money in the markets. In the quest to make apt decisions that lead to profit, investors often seek out information about the shares and make their portfolios based off this information.

Efficient Market Hypothesis (EMH) says that if everybody had access to the same amount of information then every share should be priced accurately and that nobody should be able to consistently beat the market as purchasing undervalued stocks or selling stocks at inflated prices will be impossible. EMH also implies that any novice should be able to perform just as well as an expert. Things like expert stock selection and timing the market would be nothing but myths and the only possible way to make more money than the average Joe in the stock exchange would be by investing in riskier shares as they will have higher rates of return. Believers would also argue it is pointless to search for undervalued stocks or to try to predict trends in the market through either fundamental or technical analysis.

Proponents of the Efficient Market Hypothesis conclude that, because of the randomness of the market, investors could do better by investing in a low-cost, passive portfolio. But we can see that this is clearly not the case. There are a few reasons why EMH could be wrong like different perceptions of the same information, time taken to act on new information, some people get information before others, human error and emotional decision making. But above all this, there are examples of investors like Warren Buffet that have consistently beat the market and this is clearly in violation of the efficient market hypothesis.