Are the Sharemarkets “Efficient?”

Or are there opportunities
for reasoned investors?

The so-called “Efficient Market Hypothesis” is a model for market interactions that has dominated financial literature for the last 30+ years.

In summary, the Efficient Market Hypothesis asserts that prices of financial assets - stocks, bonds and property - already reflect all known information. Prices are unbiased because they reflect the collective beliefs of all investors about future prospects.

The Efficient Market Hypothesis predicts that it is not possible to consistently outperform the market by using any information that the market already knows, except through luck.

(Note the Efficient Market Hypothesis should not to be confused with Efficient Frontier portfolios!)

The Efficient Market Hypothesis, if true, means investors will not find undervalued products because all products are fairly valued at all times. If true, there is no need for research or good advice!

However, there are many people (including us at Archimedes Financial Planning) who have severe reservations of the Efficient Market Hypothesis and the associated Modern Portfolio Theory.

Some thought-provoking reading material covering whether the markets are efficient include:

•  "Why economic theory is out of whack"  Mark Buchanan, New Scientist
• “The (mis)behavior of markets” by Benoit Mandelbrot and Richard Hudson
• “Fooled by Randomness” Nassim Taleb (second edition).

If you’re interested in this debate, do a search on the web.

Archimedes Financial Planning is skeptical of the Efficient Market Hypothesis. We believe under-valued products can be found, especially when Behavioural Finance techniques are understood.