ARE THE MARKETS EFFICIENT?

One of my professor at the university gave us some advice, which was shocking and so disappointing first. He said the markets are basically efficient and in long term we cannot beat the market. Maybe we could have some good years and then some bad years so the performance couldn’t be over the market’s performance. No one can consistently outperform the market over time. If someone is outperforming, than someone else is under-performing. I was not happy when I heard that statement. I was thinking about Warren Buffett, George Soros, Jesse Livermore, Ray Dalio, John Bogel, Stanley Druckenmiller, Jim Rogers, David Tepper, Peter Lynch, Paul Tudor Jones, Richard Dennis and my question was obvious. If that Efficient Market Hypothesis(EMH) is right, as my professor said how the great investors could beat the market each year in the last 4-5 decades.

The EMH theory says the market is just a wisdom because the market incorporate all relevant information within seconds and reflects also on information. I doubt that, in my view most of the cases the market is wrong and not efficient. The market loves the extremes which impossible to analyze by EMH. They say the market is rational. So the EMH school really believes the market in March 2000, when the Nasdaq was at 5100 was rational? I guess they are not sure about that.

The Nobel prize winner Robert Schiller helps me to understand that paradox – with his Unefficient Market Hypothesis(UMH). It is totally against the EMH theory, which is promoted by Eugene Fama, the other Nobel prized scientist. The market sometimes overbought and sometimes oversold, but the relevant information are the same. How could happen that? Because irrationality needs to be in the market. The best traders and investors who are capable beating the market use these weaknesses. The market is more complex and random that the EMH states. There are millions of investors with millions of emotions on the market and we are not able to analyse the human factor. It is fruitless to do it. The markets are irrational as we are as human beings either. The market is highly imperfect organism. Driven by fear and greed of investors.

That is why the EMH proponents offer that just own indices not stocks and hold those positions for years or for decades. As John Bogel does. That is true, no doubt that small private investors are underperforming the market always, the bad news is that most of the professionals do as well. So for them the best solution is buying the indices and being lazy, just lay back and wait.

If you believe that we are as human beings are rational, not emotional and always make calculation rationally without any biases you would love the EMH. Frankly I am more believer in behaviorial school and following the UMH. I don’t believe that the market is impossible to beat. If I just look great traders performance or if I look at our performance:  http://www.bfmassets.com/performance

I love that Robert Schiller’s quote „... just because markets are unpredictable doesn’t mean they are efficient.”

So be optimistic and don’t believe the common mantra you cannot beat the market. You can kill it.

The BFM Assets Team.