How Efficient are Markets Really?
Pretty damn efficient, it turns out!
As Tony Yiu cautions,
The investment opinions expressed in this article are my own. Please do your own due diligence before investing.
With that out of the way, let’s dive in.
Introduction
When the Efficient Market Hypothesis (EMH) entered mainstream thinking in the 1960s and 1970s, financial economists found themselves on opposing sides: markets were either efficient, or they were not.
We now know that it’s not a question of if the markets are efficient but to what degree they are inefficient.
The question is especially significant for active traders. If markets are mostly efficient, the average investor cannot hope for returns larger than the stock market in the long run. If the opposite is true, then the average investor can beat the market in the long run.
Market efficiency comes in three forms:
(1) Weak Form Efficiency: historical prices are priced into current market prices. Therefore, we cannot use historical prices to beat the stock market.
