Investing and the
Efficient Market Hypothesis
Part 2

But, on the other hand, let's suppose for the sake of argument that investors, as a whole, are lemmings and markets systematically misprice stocks.

Such a market would surely be an easy game for a smart investor with real analytical skills! But, there's more than just one smart guy out there! There are thousands of expert analysts looking for over or under-valued securities.

The opportunities to generate excess profits are diminished when these expert investors trade away disparities between price and value.

In other words, a relative few people with little bits of true information determine prices.

The problem is that the smarter and more enthusiastic those few are, the more they ruin things for each other, and the market gets more and more efficient!

The efficient market theory is a good first approximation for characterizing how prices in a liquid and free market react to the disclosure of information. In a single plain word, "Quickly!"

If they did not, then the market is lacking in the opportunism we have come to expect from an economy with traders constantly collecting, processing and trading upon information about individual firms.

The fact that information is impounded quickly in stock prices and that windows of investment opportunity are fleeting is one of the best arguments for keeping the markets free of excessive trading costs, and for removing the penalties for honest speculation!

Speculators always keep market prices close to economic values ...

And this is good, not bad!

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