Glossary
Efficient Market Hypothesis (EMH)
The theory that prices quickly reflect available information, so consistently beating the market after costs is very hard.
The efficient market hypothesis holds that asset prices reflect the information available about them, and adjust quickly when new information arrives. If that is true, no one can reliably earn higher returns than the market, after adjusting for risk and costs, by trading on that information. The idea is most closely associated with economist Eugene Fama, whose 1970 review in the Journal of Finance set out its modern form; he shared the 2013 Nobel prize in economics for work on asset prices.
Three strengths of the claim
- Weak form: prices already contain everything in past prices and volume, so Technical analysis cannot consistently add value.
- Semi-strong form: prices reflect all public information, including financial statements and news, so ordinary Fundamental analysis cannot either.
- Strong form: prices reflect even private information. Few defend this version, and laws against Insider trading assume it is false.
Evidence on both sides
Supporting the theory, S&P's SPIVA scorecards have repeatedly found that most actively managed US large-cap funds trail the S&P 500 over 10- and 15-year periods, which is the practical case for index funds. Against it, researchers have documented persistent patterns, such as the Momentum and value effects, and episodes like the late-1990s technology bubble that are hard to square with rational pricing. Robert Shiller, who shared the same 2013 prize, built much of his work on those excesses.
A useful middle view
Many practitioners treat markets as highly but not perfectly efficient: mispricings exist, but they are hard to find, often small, and costly to exploit after fees and taxes. That view explains both why beating the market is rare and why some investors still try.