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nopie  1yr ago (text post)   1617 thread views

Do you believe in efficient-market hypothesis (EMH)?

During discussion about things where you had strong opinions and then changed your mind, someone mentioned EMH. Do you believe in EMH and if so is it strong or weak version?

I used to believe EMH but not strongly. The pandemic changed my view because I managed to invest some money when the stock market dived and was clearly influenced by overly pessimistic view of the impact of covid. Some might argue that the market reacted to the irrational government measures, so it is not that the case that the market was mistaken. I still think that investors were equally irrationally pessimistic. I reject the view that this is a hindsight and I was merely lucky. I am not big expert and I did not possess any proprietary information. I had the same information as everybody else, I just didn't let my emotions take over me. This is further confirmed that even today when all the events have passed exactly as predicted, majority of people still maintain their mistaken views that covid was very dangerous to young and non-risk population.

It is the only time when I saw the rest of the society to be so wrong in their views and clearly this was my once-a-lifetime chance. I haven't see any other opportunities for easy money so far but I think that people who are experts in their fields and investors might have been able to find more opportunities.

One of them was found by Michael Burry who definitely saw that the 2008 financial crisis was coming. He wasn't just lucky because he had read and analysed all the documents and had to create special investment instruments to profit for it. In this way, it wasn't easily accessible by laypersons like me who have no time or understanding about investment. Again, most professionals were blinded by collective frenzy.

What is your opinion about EMH?

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My friend, who should know, says:

So I would say that most people think about the efficient markets hypothesis as saying an investments return should mostly be static or that it should be not possible to beat returns consistently. The textbook definition is that it reflects all information. People think that this breaks down because of numerous observed behavioural traits that affect the market and generate opportunity in value stocks. But I do not like to think about it this way because I think we should just look at what a market is literally. Are prices reflecting the demand for an item efficiently at this time, relative to substitutes and alternatives? I think it usually does. And because we are dealing with deep uncertainty, I just don't buy that a price deviating significantly from long run expected future earnings is evidence of inefficiency.

I could make this explanation clearer. I just have alot of problems with people ascribing meme stocks etc to inefficiency when the market isn't for some abstract return basket but for real social phenomenon. The question should be about supply and demand for different investments. When everyone wants to invest you will naturally get overpriced bubbles the same way when everyone likes to buy sneakers. But the phrasing of the efficient market hypthesis leads people to believe that because supply and demand for investments fluctuate and people devote capital to inferior substitutes during times of shortage, that they are behaving irrationally. I might have a problem with the formulation of the efficient markets hypothesis maybe.

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