Efficient Market Hypothesis

The efficient-market hypothesis (EMH) infer that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information. The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future. The EMH was developed by Professor Eugene Fama at the University of Chicago Graduate School of Business.

Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information which is not already available to everyone else.

There are three common forms in which the efficient-market hypothesis is commonly stated:

Weak-form efficiency
* Excess returns cannot be earned by using investment strategies based on historical share prices.
* Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns.
* Share prices exhibit no serial dependencies, (there are no "patterns" to asset prices). This implies that future price movements are determined entirely by unexpected information and therefore are random.

Semi-strong-form efficiency
* Share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.
* Neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns.
* To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.

Strong-form efficiency
* Share prices reflect all information, public and private, and no one can earn excess returns.
* If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored.
* To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no argument even of strong-form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers.

The nature of information does not have to be limited to financial news and research alone; indeed, information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. According to EMH, as prices respond only to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to out-profit anyone else.

In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. So, a planned approach to investment cannot be successful.

In the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market - Warren Buffett, whose investment strategy focuses on undervalued stocks, made millions and set an example for numerous followers. There are portfolio managers who have better track records than others, and there are investment houses with more renowned research analysis than others.... Read more!

Defining goals

Before deciding on an investment decision, we need to know our investment goals.
Below are three categories to help us deciding what kind of assets we are going to acquire for our investment especially in stock market. Each implies a different level of risk.

- Capital appreciation. Our primary goal is to grow the value of the portfolio. The best capital appreciation prospects are usually the most volatile, and hence, the riskiest stocks.

- Balance of capital appreciation and capital preservation. We want to grow the capital but without undue risk.

- Capital preservation: You want to achieve reasonable returns but priority No. 1 is preserving your existing capital. This is the lowest risk category.

Pick portfolio objectives with risk tolerance in mind. If we're likely to lose sleep when one of our stocks drops 10%, avoid the pure capital appreciation portfolios. Conversely, these portfolios might be our bag and craving excitement and want something to talk about with friends and co-workers. Some investors put their "serious" money into low-risk portfolios, but allocate a small amount of "fun" money for speculative portfolios.


Do you have the time?
Some portfolios require monitoring on a daily basis, while others require only occasional checks. Here are a specification of time commitment for each portfolio:

• High. Check on stocks daily, or at least, weekly.
• Medium. Check on stocks weekly or, at a minimum, monthly.
• Low. Check on portfolio only occasionally.

Spread your bets
Spreading the risk by acquiring stocks through diversification.

With only a few stocks, one bad performing stock will banish our returns. At a minimum, each portfolio should contain at least 10 stocks, and 15 would be better.

Whether that's practical depends on how much we're planning to invest.

Momentum Stock
Capital Appreciation (Time Commitment: High)

Momentum-stock selection strategies are the favorites of hedge-fund managers and other pros because they're effective at spotting growth stocks likely to move up fast. Two common characteristics in momentum strategy: They require stocks with a combination of strong price charts and strong recent earnings growth.
This particular stock are profitable small companies that have outperformed most stocks over the past year and are trading near their 52-week highs. They must have recorded at least 18% year-on-year earnings growth in their last quarter and have some institutional ownership.
Because these are "hot" stocks, you must watch them closely, preferably, daily. Sell any stock that falls 10% or more from its recent high.

Growth stocks
Capital Appreciation (Time Commitment: Medium)

This stock looks for reasonably priced stocks that have recorded moderate sales and earnings growth over the past five years. It is not as volatile and doesn't need to be watched as closely as the Momentum stocks. Buy it and plan to hold for one year. Until then, sell only stocks that have been acquired by another company or become involved in major ongoing scandals.

Dogs
Balanced (Time Commitment: low)

The Dogs is a contrarian, are likely to overcome problems that are currently pressuring their share prices.
The analysis are based on market capitalization (recent share price multiplied by number of shares outstanding). The dogs strategy screened for stocks that have market big caps, but the price drops over the past 12 months. The strategy involves picking the 10 worst performers from that list. Buy it and hold for one year. Then repeat the process. Do not sell any stocks during the year unless they are acquired by another company.

Boring dividends
Capital Preservation (Time Commitment: low)

Reduced expectations generally drive share prices down. This strategy pinpoints stocks with already-low expectations. They're only expected to grow earnings around 10% to 15% annually, which is too low to interest most growth investors. They pay dividends equating to 2.25% to 5% yields, which is too low to attract dividend yield chasers. The fact that they've grown dividends at least 5%, on average, annually over the past five years doesn't impress many. Buy it and hold for one year.

Please remember these techniques are not putting into account of the economic turbulence, political situation and so on and may not applicable in all the situation..... Read more!

Building a Stock Portfolio To Meet The Investment Goals

When it comes to building a stock portfolio, it is very important to understand the investment goal, and considering how much time is devoted to do the monitoring, the amount of money you have (as suppose to suffer financially if thing goes against yours positions) and how much risk ones are willing to take when investing in the stock market. These two later is similar, just want to emphasize it rather to regret it.

There are many vehicles to do an investments: time deposit, bond, real assets investments, stock, forex trading etc. Stock investments as one of the investment vehicle can help your investment portfolio by providing potential growth, income from dividends or a combination of the two, which is known as return.

However, the value of stocks can fluctuate, and when you sell your stock, it may be worth more or less than you originally paid. When building a stock portfolio, you should carefully consider the risks of investing in the stock market and develop a diversified asset allocation strategy that fits your goals, investing time frame and risk tolerance.

Diversifying stock portfolio is a way to help offset the risk in the stock investments. The goal is to spread out stock investments in different sectors and include different investment characteristics so that when a stock or sector performs poorly, the performance of your stock investments in other sectors may help offset the swings in the total value of your stock portfolio.


Following are some basic tips which can be used to make the diversification:

• Invest in approximately 20 to 30 stocks in at least six to eight sectors with different investment characteristics.
• No more than 25% of the total value of your stock portfolio should be in any one sector.
• No more than 15% of the total value of your stock portfolio should be in any one stock.
• You should invest a minimum of approximately 3% to 4% of the total value of your stock portfolio in each stock.

Deciding which stocks to invest can be difficult, especially if the tolerance for risk is too low or the money which are allocated for stock investment are too low. That's why it's important to develop an asset allocation strategy, research stocks that fit within your strategy and invest in stocks that have the potential to meet your specific goals, whether you want growth, income or a combination of the two. In this points, the "do-it yourself investor" need to make a research to find the best stock for his/ her own portfolio. There are plenty of resources in the internet to learn, the suggestion is do not rush, take it slowly, if the money to invest is too low do not push it, wait till the amount is enough to make a good diversification.... Read more!