Are stock markets efficient, inefficient, random, or just plain who the f*** knows ?
It was Eugene Fama, who in 1965, published his now famous thesis purporting to prove beyond any doubt that markets are totally efficient in processing information and because of that therefore, it was most unlikely that any investor could, through extra effort and knowledge, in the long run outperform the market. It is impossible since no one can possibly know the trend of the market, and what will happen tomorrow.
In particular, Fama postulated that:
- information about share market stocks is widely and cheaply available to all investors and, therefore, all known and available information is already reflected in current stock prices
- market movements are essentially random, given that they depend on the emergence of new information, which is unpredictable
- investment analysis was futile and analysts do not consistently outperform a market
- technical analysis, based on forecasting stock prices through the knowledge of past price movements, does not work.
(Taken from Novak-Reich, The Bell Does Ring, Timing the Australian Stock Market with Gann and Elliott Strategies, page v.)
But as Warren Buffett once pointed out; believing the market to be efficient, does not prove that it is always efficient. And like Novak-Reich, I have found plenty of ways to exploit observed market behaviour, using technical analysis, regardless of whether the market was acting efficiently of not. The chart of JUM illustrates this point. Both these moves into mid points by JUM were traded, selling on the actual news announcement. Are markets efficient ? You decide.
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Copyright: Phil Anderson, 2004