The Finance Professor

Does the Efficient Markets Hypothesis Work?

 

The semi-strong form assumes that public information is received by all market participants at the same time; that all public information is processed by all participants at the same time; all market participants take action on public information at the same time; and, that all market participants interpret the public information in a uniform manner.

The strong form assumes the use and dissemination of both public and non-public information just as I just mentioned for the semi-strong form.

How realistic is the EMH? The weakest argument for the EMH is in favor of the strong form. To put it bluntly, the strong form only exists in academic laboratories and in a fantasy world. It simply cannot exist in reality. We have laws and regulations that would prevent certain information from being distributed publicly or selectively. Furthermore, laws and regulations prevent acting upon nonpublic information.

The semi-strong form assumes that everyone will receive and act upon the information simultaneously. That is too simplistic an assumption and does not happen in the real world.

If anything, the weak form would be fleetingly operative in the existing U.S. marketplace. However, there are many people who will trade and make money based upon prior chart patterns, trends or trading history that one has to even question the validity of the weak form of the EMH.

In a world with Jim Cramer, Warren Buffett, George Soros, SAC Capital, Doug Kass and other successful investors, I believe it is hard to prove the EMH in any form is operative. My advice to investors and traders: Do not let a theory like the efficient markets hypothesis get in the way of making money. If you have a fundamental, technical or even a statistical basis for investing or trading, I would suggest sticking to your model or plan as long as it makes money.

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At the time of publication, Rothbort had no positions, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.

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