Efficient Market Hypothesis (EMH)
Candlefocus EditorAt its core, the hypothesis asserts that at any given time, security prices accurately reflect all available information. This means that markets are informationally efficient and that investors can receive no “trading profits,” other than those resulting from normal risk premiums. The hypothesis also implies that it is impossible to outperform the market without taking on additional risk.
Proponents of the efficient market hypothesis believe that the market is difficult to beat over the long term and the best strategy is to invest in a diversified set of assets in the form of a low-cost, passive portfolio. By passively investing, an investor will receive their fair share of the stock market's returns and won't be left behind as a result of making decisions based on misinformed speculation.
Opponents of the EMH argue that stock prices may deviate from their fair market values and that it is possible to outperform the market. They believe that investors can benefit from active portfolio management and stock picking. This can be done by attempting to identify undervalued stocks and taking advantage of the arbitrage opportunities they provide.
Whether or not the efficient market hypothesis is true has been debated for a number of years and conflicting evidence and opinions exist. Ultimately, though, proponents of the EMH tend to have a longer-term perspective on their investments, while those who reject the EMH may actually participate in activities that can have negative long-term outcomes.