Efficient Markets Theory

The stock market is a collection of individual human beings, and human beings are fallible. With almost every stock trade, one person is right and another is wrong. While the averages do in fact represent the net effect, or “collective wisdom” of market participants’ judgments about the future, history shows time and again that millions of people can be as wrong as one, and the stock market is no exception. The nature of the market simply allows participants to adjust and correct their errors rapidly. Any method of analysis that claims the markets are infallible is flawed at its roots.

The theory of “efficient markets” is a case in point. The main premise is that with the advent of computers, information is disseminated so fast and efficiently that it is impossible to “beat the market.” This is nothing more than an extrapolation into absurdity of Dow Theory’s tenet that “the averages discount everything.” It is also ridiculous. The idea that everyone receives all significant information simultaneously is absurd because everyone doesn’t agree on what is “significant.” Even if everyone did receive exactly the same information simultaneously, they would respond to it according to their own particular circumstances and preferences. If everyone knew exactly the same things and responded the same way, then there would be no market! You must always remember that markets exist to facilitate exchange, and exchange is the result of differences in value preferences and differences in judgments.