“Financial markets are efficient. All available information has already been entered. For this reason, no market participant is able to achieve permanently above-average profits.”
If the tale of efficient markets is true, why are some of the greatest investors making so much money with their investments in the stock market and have such an incredibly high a fortune, like Warren Buffett, Charlie Munger, Joel Greenblatt, Howard Marks, Peter Lynch, Monish Pabrai, to name but a few?
The answer is quite simple:
The claim is simply not true. Even if the founder of this thesis, Eugen Fama, has received the Nobel Prize in economics in 2013.
One could argue that in the age of the Internet and the endless information for everyone, this thesis is getting real because people can immediately know all the necessary things about a company with a simple click and therefore react immediately to changes in the company. The supply and demand for shareholdings, and thus the price of the shares, would be directly determined by the information obtained in a fraction of a second.
But that is not true!
Although efficient markets people still go around saying there is a “mountain” of evidence supporting their hypothesis, the truth of the matter is that it’s a very old mountain that’s now eroding rapidly into the sea. (Robert Haugen)
If I subscribed to the efficient market theory I would still be delivering papers. (Warren Buffett)
Because not emotionless machines deal with stocks, but people. And even the computer programs, which buy and sell shares largely independently according to certain parameters, do so because of the parameters that people have given to them. So here, too, man actually act.
And when man acts, he always deals with emotions. Even as an investor, man is greedy, panicky, anxious, euphoric, doubting, etc. He just cannot stop his emotions. He is not the rationally acting Homo Oeconomicus.
Humans are envious of the neighbors whose car is newer and bigger. He is delighted to be able to make a more expensive holiday with his family than the work colleague. That is how it is.
The market, according to stock exchange genius André Kostolany, consists of 90 percent of psychology and only ten percent of facts.
And the psychological mood of the individual market participants is fundamentally different: while one thinks, a stock is too expensive and therefore sells it, the other one considers it cheap and buys it. The interesting thing about this is that the two market participants need each other, like men needs water to live. Only when someone wants to buy, another one can sell his shares. In efficient markets that would be impossible. Efficient markets would collapse because they would lose the basic market requirements, the market itself. No one would act.
The good news!
As an investor, we are happy that there are no efficient markets and that people act with emotions. We can use this to build our fortune. Only inefficient markets offer us the opportunity to make money on the capital market.
How to do it and what you have to know, the Bridge2Fortune® Academy shows will show you in its secrets of the right behavior and the mystery of value. Sign up right now to build a fortune with people’s emotions.
By the way, with one thesis, Eugene Fama was right: share prices are unpredictable. Although they are not random movements as they claim, they are an expression of human emotions. How people react to events cannot be predicted. For this reason, price developments, at least in the short term, cannot be predicted.
In the long haul, however, it can already be estimated whether one can make money with a company.