I don't understand

Reader comment on: The Efficient Markets Hypothesis Comeback

Submitted by ben (United States), Apr 14, 2010 15:44

If the efficient market hypothesis believes that at any given point in time, the price of stocks and bonds reflect exactly what they are worth, what would be the investment theory that a trader would use? One is conceding right off the bat that google at 400 is worth 400, or citi at 2 dollar/share is worth that. Don't most investors buy something because they think it will increase in value, which by definition means that it is currently undervalued, and therefore not efficiently priced? I am sure I am missing something here, but I don't know what. I would think someone who traded on the efficient market theory would track the SP perfectly, or would have an equally random chance of beating or being beat by the market (perhaps that is what happened).

It is also very problematic as an argument to say that this person who believes in efficient markets is up 100% (as opposed to 68% for the market) so therefor this in some way proves the hypothesis. A) this is anecdotal, and B) How does this shape up against Soros making 3 billion last year, or those who shorted the housing market making off like bandits - I am quite confident they are not big believers in efficient markets. Perhaps a person, not me for sure, could examine the returns of a sample of money managers with differing beliefs on economic theory and compare their returns. i would be curious to see the results.

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