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....