The Efficient Market Hypothesis (EMH) is a financial theory stating that asset prices, particularly stocks, reflect all available information, making it impossible to consistently achieve higher returns than the overall market. Developed by Eugene Fama in the 1970s, it implies that stocks always trade at their fair value, meaning “beating the market” through expert analysis is impossible.
Key Components and Forms of EMH
The theory suggests that because information is immediately incorporated into prices, only new information (unpredictable news) can change prices, leading to a “random walk”.
Weak Form: Suggests that all past trading information (prices and volume) is reflected in current prices, meaning technical analysis cannot produce superior returns.
Semi-Strong Form: Argues that all public information (earnings, news) is already incorporated, meaning fundamental analysis cannot produce superior returns.
Strong Form: Asserts that all information, public and private (insider info), is reflected in prices, meaning no one can beat the market.
If the EMH is true, investors should favor passive investing strategies, such as buying low-cost index funds, rather than trying to pick individual stocks or hiring active managers. The theory implies that active management is ineffective, as the cost of research and trading outweighs any gains.
Critics argue that market anomalies, such as long-term market overreactions or periods of irrationality driven by behavioral biases (fear and greed), prove that markets are not perfectly efficient. Behavioral finance suggests that investor psychology causes prices to deviate from their true value.
I am not particularly concerned about the wealth gap between the rich and the poor. The problem is not wealth, its income and the ability to save rather than consume. Too much promotion is put on consumption, too little is put on savings and investments.
People are bombarded with advertising constantly, asking them to go out and buy more stuff that they subsequently have to pay to get rid of at the landfill. Stuff that could instead be turned into investment and future gain – both in economic growth and personal savings.
Most poor people today have fancy, enormous color televisions and cable TV that blasts in advertising and violence to one’s home 24-7. They get caught up in upsetting news stories and think they need fancy things to live the good life. They pay enormously for high speed internet service and keep their homes toasty all winter with fossil fuel heat and frigid all some with coal powered air conditioning.
To be sure, I wish primary schools would invest more in financial education and budgeting. Education should emphasize frugality not consumption. People should be educated about the evils of debt, encouraged to invest rather than borrow.
I understand poor people live with very tight budgets due to limited income. But budgets can be stretched, savings can be prioritized over spending and borrowing. Wealth can be grown, even in the most megar of budgets.
It might seem silly but I always unplug my microwave when it’s not in use.
A while back, I plugged my microwave into my Kill-a-Watt meter and found it was using 2 1/2 watts per hour, when the microwave was off to power the clock and controls 24-7. 60 watt hours a day, doesn’t sound like a lot but there are 365 days a year, and that works out to be nearly 22 kW/h a year.
At 15 cents a kilowatt hour, that’s $3.30 a year. Not a real big expense, but every little thing adds up. Not to mention the carbon emissions, the pollution from the extraction of coal, uranium and natural gas to spin the turbines.
Not a lot, but electricity isn’t free and unplugging the microwave isn’t a lot of work.
"Americans’ are saving their money at the lowest rate in 73 years-the lowest rate since the Great Depression. The national personal savings rate was negative (!) 1% in 2006. That means that as a whole, the country is spending more than it is taking in. With the economy on a downhill slide, Americans may start tightening their purse strings. But I predict that instead, people will simply start running up more credit card and loan debt. They have gotten used to a certain lifestyle, and feel entitled to continuing living it."
