Is the Stock Market efficient?

Yardbird: Is the Stock Market efficient?
According to the “efficient market” theory, all available information about a stock is already reflected in its price, therefore it is impossible to predict its future movements, since no one can predict the future. This is sometimes called the “random walk” theory, since stocks seem to move in completely random ways. For example, a company reports record earnings, yet its stock price falls (this is not unusual). A chimp throwing darts at the newspaper stock page can pick winning stocks at least as well as, if not better, than a stock professional. (I think this experiment has actually been tried.) The few professionals such as Peter Lynch or Warren Buffett are simply lucky. In addition, they established their reputations in past years when stock information was not so widely disseminated. Now, with the internet, all available information is truly available to all, so the markets are completely efficient. Do you believe this theory? Why?
Isn’t there anybody out there who will defend the “efficient market” theory? I thought some economists won the Nobel prize for it (?).

Answers and Views:

Answer by automaticslim
which stock market? U.S.? British? Klingon?

Answer by John Ross
It’s hogwash. All of it. There was no chimp experiment. Many firms model stock portfiolios routinely outperform the market. I’d suggest you take a look at firms like Edward Jones’ 7- and 10-year track records. Even more impressive are the performance records of firms like the American Funds, who again routinely outperform the markets by doing extensive research in ways the average investor could never hope or even imagine to. And lastly, check out the performance records of the endowment managers at Harvard and Yale for example. They each manage over $ 15 billion and routinely put up an average annual return in excess of 15%. No chimp, or index fund, will ever do that.

Hope this helps!
–J.

Answer by Frank Castle
I could explain you in great detail why the Stock Market is not efficent or I could email 10 stock picks that are going down in a roll followed by 10 stock picks that are going up in a roll which of course would prove the stock market does not move at random.

I asume you are familiar with probabilities and you realize it is impossible to guess the direction of 20 stocks in a roll.

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Answer by Always Right
It is certainly not efficient. If it were, nobody would make any money. You are correct in stating that information is widely available. But it’s not the availability of information that matters, it’s how you use that information, or in the case of many people, whether you even use that information. There are too many people out there that don’t have any clue what they are doing, and that creates very lucrative inefficiencies.

Answer by Joe
I am not a complete believer in efficient market theory, so I can’t be a good defender of it. However, I will say research has shown the market is partially efficient. Evidence shows that the vast majority of mutual fund mangers can not beat the market. See the first link below for a discussion. (I don’t agree with everything in this link, however.)

I find John Ross’s claims of “hogwash” less than convincing. His facts are wrong. American mutual funds do not routinely outperform the market. See the second link. American Funds Washington Mutual A has underperformed the market 4 out of 7 years. It did well, but it did not routinely outperform.
Harvard does not routinely have an average yearly return greater then 15% every year. See the third link. In 2003, they reported they did 10.1% over 5 years and 14.7% over 10 years. However they did do well.
There have been monkey throwing darts contests. The most famous ones were in the Wall Street Journal. However, they didn’t actual train a monkey to throw darts, they had a staff member play the monkey. The professionals won, the monkeys lost.