Assumptions of Efficient Market Theory

  1. There are many investors who put effort into research.
  2. They are smart, diligent, objective, proactive, and well-prepared.
  3. They can all obtain available information, and the channels through which they obtain it are roughly the same.
  4. They can buy, sell, or short (i.e., bet on a decline) all assets.

Due to these reasons, the Efficient Market Hypothesis posits that available information will smoothly and effectively integrate into prices, adjusting when the price deviates from the intrinsic value, thereby eliminating the discrepancy.

Assets that highly conform to the efficient market include:

  • Assets that are widely known and tracked by many people;
  • Assets that are socially recognized, non-controversial, or not taboo;
  • Assets that possess clear and easy-to-understand advantages, at least superficially;
  • Information related to the asset type and composition elements can be disseminated universally and fairly.

Issues in the Above Assumptions

Most people are driven by greed, fear, jealousy, or other emotions, which compromises the possibility of maintaining objectivity, allowing obvious errors to take advantage.

Consider the Following Questions

  • When thousands of investors are ready to seize the opportunity and willing to raise the price of cheap assets, why are there still cheap assets?
  • When the return relative to the risk is obviously high, does that mean you might be ignoring some hidden risks?
  • Why are sellers willing to accept a price that allows you to achieve excess returns when selling an asset?
  • Do you really know more information about the asset than the seller?
  • If this is such a good deal, why isn’t anyone else rushing to buy it?

One thing to remember: The market being efficient today does not mean it will be efficient forever.

Conclusion

No market is a completely efficient market or an inefficient market; this is merely a matter of degree. I sincerely thank the inefficient market for the opportunities it provides, but I also respect the concept of the efficient market, and I firmly believe that mainstream securities markets have enough efficiency that trying to find a winner within them is basically a waste of time.

There is a fish in every game; if you haven’t figured out who that fish is after forty-five minutes, then you are that fish.