Efficient Market Hypothesis
| Dear Ladies and Gentlemen
Much as expected, I received many messages concerning my last weekly mail called “a quantum of decency”. Also, much as expected, my personal perspective was not necessarily congruent with the perspectives of all of my readers. Nevertheless, thankfully, and again much as expected, most of the messages not agreeing with my point of view came along politely and thoughtfully, and I had many interesting conversations with readers explaining (agreeing or not) their perspectives, and this is what my weekly emails are all about, at least for me. Thank you very much to Barbara, Bob, AJ, Tom, Thomas, Mark, Steve, John, Mike, David and all the others for sharing your points of view! Now, before writing about the market efficiency hypothesis and because it fits last week’s topic so well, I would like to share a quote by the Swiss/British writer and philosopher Alain de Botton. When asked what adulthood meant to him, he said: “When faced with difficulties, they (adults) look for solutions. They do not despair at the first hurdle. They know that many problems that seem big and important at the moment are not at all in a long-term perspective and will eventually resolve themselves. Above all, being an adult also means always being friendly and showing compassion for others.” Today’s topic is about EMH, the efficient market hypothesis (EMH), which is a mathematical-statistical theory of finance. The EMH states that asset prices reflect all available information. Therefore, assuming this is true, no amount of analysis can give an investor an edge over other investors in a given market. EMH does not require that investors be rational; it says that individual investors will act randomly, but as a whole, the market is always right. In simple terms, “efficient” implies “normal”. For example, an unusual reaction to unusual information would therefore be expected. If for example, a crowd suddenly starts running in one direction, it would be normal for anyone to run in that direction as well, even if there is not a rational reason for doing so. A direct consequence to believers of that theory is that no market participant can beat the market in the long run. Many market participants and even financial markets scientists object to it. Warren Buffet, Daniel Kahneman, Amos Twersky and Richard Thaler have been criticizing EMH on various occasions. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Let's meet!
Do you have questions about our product or do you want to arrange a personal meeting?
