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Why I Believe the Efficient Market Theory Is Bunk
Posted By Ron On April 15, 2008 @ 12:01 AM In Life,Money,Personal Finance | Comments Disabled
The Efficient Market Theory (a.k.a. Efficient Market Hypothesis), says that markets are completely efficient and that all prices in the market already reflect the available knowledge and expectations of investors.
Subscribing to this theory means that no one is able to consistently beat the market and that index funds are your only hope of making money. The idea that you cannot beat the market was championed by Professor Burton Malkiel from Princeton University, who wrote A Random Walk Down Wall Street.
Let’s examine why I believe the Efficient Market Theory (EMT) is bunk:
1. Professor Malkiel admits that the stock market does “go crazy from time to time” in an interview  with Geoff Colvin of Wall Street Week with FORTUNE. If markets are SO efficient, why do they go crazy? Can no one take advantage of this craziness? Was the tech bubble just a figment of my imagination? How about the housing crisis? Am I just dreaming right now?
Is the market NEVER mispriced? (If you subscribe to the Efficient Market Theory, your answer is yes.)