BGR,
If you are not an insider, and by dint of your belief, you cannot
find underrecognized value in any investment, then why bother
investing? Because the stock market is going up? If markets are
efficient, then why is the market going up when earnings are flat
to lower, and future earnings expectations continue to be adjusted
downward? Do earnings not matter? If that is the case, then why
not just dump your money here (don't forget to kiss it goodbye):
stockgeneration.com
If you claim that the markets are perfect discounting mechanisms
(i.e., they are already discounting future increases in earnings)
then why did the stock market tank last summer, even as bonds were
exploding upward? Why was everyone so worried?
Efficient market theory does not account for the impact of human
emotions on the stock market. Although "Value" is subjective,
belief in the efficient market hypothesis is also a subjective belief.
It cannot be verified, and it does not meet another important
criterion that all putative scientific theories must meet: it is
not falsifiable. That is, I cannot construct a single test that
could refute EMH in the minds of its followers. EMH therefore
belongs more in the province of religion or metaphysics rather than
economic science.
Also, note what Fama's basic assumptions were...
a) no transaction costs (trans. costs include taxes, commissions,
and the cost of bad executions from the
sale of order flow)
b) information is disseminated equally among non-insider
market participants
c) all participants hold similar interpretations of that information
------
Does EMH actually apply to real markets, or just imagined ones?
These assumptions do not hold in the non-academic world, and if
the assumptions do not hold, we cannot accept the conclusion, right?
AA |
