Defining the Efficient-Market Theory
- The EMH is a hypothesis stating a share price reflects all available information
- Implying, it's impossible to beat the market, since prices should reflect any new information
- In other words, stocks can't be overvalued or undervalued relative to their price
- As a result, the hypothesis implies the only way for an investor to obtain higher returns is by purchasing riskier investments without complete information
Describing Criticism of the Efficient-Market Theory
- Some economists have described value investing as rooted in a rejection of the efficient-market theory
- Some economists believe the ability for investors to consistently outperform the market is indicates the theory is inaccurate
- Some economists believe the presence of economic bubbles and creashes illustrates inaccuracy as well
References
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