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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