Investing
What is the efficient market hypothesis and why should you take the time to understand it?
What is the efficient market hypothesis and why should you take the time to understand it?
The efficient market hypothesis comes in three flavors. Strong, seem-strong, and weak. Basically, it goes like this. What is known (the three flavors argue over whether it involves just public knowledge, or others including the cheaters who conduct insider trading), has already been factored into the market. Therefore, the market reflects the current conditions and it is a futile attempt to attempt to pick the winners and avoid the losers when it comes to individual stocks, or sectors of the economy, or parts of the world for that matter.
What will change the market (hopefully making you money as your investments grow over time) is what is not known at this moment, but will be known very soon after others react to the information. The collective wisdom of millions makes for a very efficient market (that does not mean the herd is always right in how they move the market).
So how can you and I benefit from this information? Do not think you know something others don’t. You are delusional if you think you have information that others do not have. Do not listen to psychics (Jim Cramer and his ilk) who predict the direction of the market and individual securities. They are delusional! Focus on owning entire markets in stocks and bonds all over the world at the lowest possible cost (no-load index mutual funds). And then sit back and let the markets do what they do. As for the idiotic pundits, let them entertain you as a dog would when he is busy chasing his tail. Onward!