Efficient Markets

The Theory of Efficient Markets is based on the concept that all the available information is in the Stock Price. Therefore, Alpha generation is not possible. Increased returns can only be achieved by increased risk.

If the individual Share Prices incorporate all the available information to investors, then the Stock Market would be considered efficient. This is the Theory of Efficient Markets. If Stock Markets are efficient, then consistent Alpha generation is not possible. If listed Stocks are always to trade at a fair value price, it will be impossible to Buy Stocks considered to be Undervalued or Sell Overvalued Stocks. Then the theory is that an investor’s return will be determined by the level of risk taken. There is no Alpha generation via Stock selection or the timing of market transactions. If one agrees with the Theory of Efficient Markets, then the logical investment is a low-cost, passive portfolio. If one disagrees with the Theory, then Stocks can deviate from their fair market values and research does add value and can generate Alpha.