Conclusions Of The Efficient Market Theory*
• The Efficient Market Theory is flawed because it does not function the way it is “supposed to” (as dictated by theorists).
• This is because markets are made of billions of daily transactions (buys/sells/shorts, etc…), and these transactions are the result of the entity (investors) which has the ability (money) to carry them out.
• Since “the entity” is human, it can be concluded that the markets are as efficient as they are inefficient because people are prone to error and inefficiency – especially of judgment.
• The bottom line is that the larger (and longer) “the entity” errs, the greater the probability there is that there lays inefficiency somewhere within the markets – while the broader markets will (collectively) display inefficiency on occasion as well.
• Thus, the markets are “efficient” in the long run – as valuations tend to “normalize” given a longer time horizon – and can be anything but in the short run. In other words, efficiency in the markets is to found in many sections (but not all sections) of the market on a regular basis, however, it is largely to be found nowhere on occasion.
• In the end, “…[w]hatever mispricing there is usually is only recognizable after the fact… because things are never as clear prospect as they are in retrospect.” – David Dreman, Contrarian Investment Strategies.
• This is because markets are made of billions of daily transactions (buys/sells/shorts, etc…), and these transactions are the result of the entity (investors) which has the ability (money) to carry them out.
• Since “the entity” is human, it can be concluded that the markets are as efficient as they are inefficient because people are prone to error and inefficiency – especially of judgment.
• The bottom line is that the larger (and longer) “the entity” errs, the greater the probability there is that there lays inefficiency somewhere within the markets – while the broader markets will (collectively) display inefficiency on occasion as well.
• Thus, the markets are “efficient” in the long run – as valuations tend to “normalize” given a longer time horizon – and can be anything but in the short run. In other words, efficiency in the markets is to found in many sections (but not all sections) of the market on a regular basis, however, it is largely to be found nowhere on occasion.
• In the end, “…[w]hatever mispricing there is usually is only recognizable after the fact… because things are never as clear prospect as they are in retrospect.” – David Dreman, Contrarian Investment Strategies.
*Burton G. Malkiel, "A Random Walk Down Wall Street"
posted by Raphael Blogger at
10:59 PM
