According to the Efficient Market Hypothesis, stocks are priced according to their investment properties. Precisely, the securities prices reflect all the relevant the information available to the public (Sewell, 2011). Therefore, investors cannot use stock picking to beat the market indexes since markets are efficient. Similarly, since capital markets are considered efficient pricing machines, we cannot expect investors to get results that are superior to that of the overall market. It is vividly explained that over 70% of the funds transacted in the mutual accounts fail to beat the market (Sewell, 2011). As an explanation to this, individuals are better off handing over their money to mutual funds and invest rather than taking control of their own portfolio. Moreover, if markets are truly efficient, then all investors will be the same when it comes to investing in stocks since no one will have an advantage over the other.
The financial products available to most investors today assume Efficient Market Hypothesis is true. Some of the benchmark for performances include the overall market index, diversification and passive investing. If an individual does not concern with the past information about the company and also has no intention of knowing about the future, he/she might decide to invest all the resources in a basket of stock. This will cancel out individual stock risk and allow your portfolio to operate on the market risk. In such situations, it is easy to understand why passive investing and index funds provide easy sells. Similarly, the financial industry has the necessary incentive at disposal that promotes Efficient Market Hypothesis.
I totally disagree with the initial post that Efficient Market Hypothesis is true. First, according to the Efficient Market Hypothesis, information about the securities prices are perceived in the same manner by all investors. Various methods are used to analyze and value stocks, and they pose a problem for the validity of the hypothesis. For example, if one of the investors decide to evaluate a stock with regards to its growth while the other one considers the undervalued market opportunities, they will conclude to different assessment report about the stock’s fair market value. One of the arguments against Efficient Market Hypothesis is that since the investors took a different approach towards valuing their stocks, it is hard to be sure with the stock that should be on an efficient market.
Second, Efficient Market Hypothesis state that no investor has an advantage over the other one with the same amount of invested resources (Sewell, 2011). Therefore, since they get equal information, they will achieve same returns. However, it is significant to consider the vast range of investment returns obtained by the investors in the entire universe. In regards to Efficient Market Hypothesis, if one investor is profitable, it implies that all investors in the entire universe are profitable. This cannot be the case in reality. Ultimately, the hypothesis suggests that it is impossible for an investor to beat the market. According to the experts, the best strategy is for a person to place all his/her investment funds in an index fund. It will increase or decrease according to the profits or losses made by the corporate. In reality, there are quite a good number of investors who have beat the market. For example Warren Buffett (Alperovitz, & Daly, 2008).
Alperovitz, G., & Daly, L. C. (2008). Unjust deserts: How the rich are taking our common inheritance. New Press.
Sewell, M. (2011). History of the efficient market hypothesis. RN, 11(04), 04.
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