Is The Market Efficient
The Efficient Market Hypothesis says (in differing degrees across three main versions) that all information for making investment decisions is available to everyone and is therefore used and completely reflected in prices- everyone knows what everyone else knows.
With the proliferation and ease of access to mountains of market data, this sounds plausible. However, there's a central part of this theory that may make it less so...us. A somewhat fantastical analogy may help illustrate.
The Efficient Market Hypothesis has parallels to, and might be correctly compared with, physical fitness programs. We'll call this theory the Efficient Health Hypothesis. There is no shortage of dieting and exercise information, it's plainly and easily available to everyone. Further, much worthwhile information on this topic is free. Additionally, this information is fairly non complex- much simpler to understand and use than financial ratios and accounting analysis. Consequently, under the Efficient Health Hypothesis, most every adult should be their optimum weight. Since we know this is not remotely the case (over one-third of the U.S. population is considered obese), it might be instructional of a couple of truths, perhaps overlooked by the Efficient Market Hypothesis, that are just as relevant in investing as they are to getting in shape: (1) knowledge is not power- the correct application of knowledge is, and (2) that correct application often hinges on discipline more than accessibility or even intelligence.
Just as it can be difficult to get yourself out of bed an hour earlier and go for a run or abstain from that piece of cheesecake regardless of the fact that you know with certainty doing so will produce favorable results for you, it can be difficult for an investor to resist the temptation to buy something simply because it's going up in price or sell something because it's going down.
Can you imagine telling a weight loss drug maker, "Your days are numbered. I'm about to publish a book titled: Guaranteed Weight Loss with No Negative Side Effects Through Exercising and Eating Right"- I don't think the threat would make their next strategy meeting.
The major flaw with the Efficient Market Hypothesis is that is assumes people are efficient. This will never be true. Gaps between intrinsic and market values may turn out to be as persistently present as the need for weight loss drugs.