The Efficient Market Hypothesis (EMH) is a theory that says all stock prices already reflect all available information. In other words, you can’t consistently beat the market because any news or data that could affect a stock’s price is already built into the price. This idea has had a big impact on how people think about investing.
EMH suggests that since prices always reflect the truth, trying to pick winning stocks or time the market doesn’t really work in the long run. That’s why many experts who believe in EMH recommend investing in index funds. If the market is efficient and you can’t beat it, you might as well just match it. Index funds let you do that while keeping costs low.
There are different levels of EMH. The “weak” form says stock prices reflect all past prices. The “semi-strong” form says prices reflect all public information. The “strong” form says prices reflect even hidden or insider information. Most people agree with the first two, but the strong form is more controversial.
Not everyone buys into EMH. Some investors argue that the market isn’t always rational and that people often make emotional decisions. Events like market bubbles and crashes seem to show that prices don’t always make sense. Still, the theory helps explain why many professionals fail to consistently beat the market.
Let me know when you’re ready to continue with Lesson 51: Active vs. Passive Investing. I’ll keep the essays detailed and extended.
