Walter Marlowe reviews the Efficient Market Hypothesis

Written by Ashwin Rattan Wednesday, 11 April 2012 15:32
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Is the Stock Market rationale?


Well, very obviously not. Adherents of the EMH are getting thinner on the ground with every passing year.


The EMH has been heavily debunked both by empirical observation (that is observations by rationale observers) and by the work done by Behavioural Finance academics and advocates.


Not only are there a number of investors who consistently outperform the indices thus undermining the basis of EMH but the work of Behavioural Finance researchers provides objective, scientifically robust evidence that we are neither rationale nor efficient when dealing with money and investments (as if we didn’t know this (at least about the other guy, intuitively and empirically).


We live in an era (maybe 10 -12 yrs. old now) of unprecedented market volatility.


As many of you know the so-called Black Swan and Long Tail Events that used to occur (statistically) once every 1000 trading days and lasted for one day now occur several days a year and are almost never confined to one day only. As many bankers now know the Value at Risk (VaR) formulae their institutions used over the last decade and still use are cavalierly and dangerously inadequate.


Why has market volatility so greatly increased over time? We can cite several factors:


  • Increased retail investor participation
  • Increased information flow to both retail and professional investors
  • The growth of hedge funds and the nature of much of their trading stratagems
  • Computer driven trading

The biggest villain is computer driven trading. It has perverted the function of stock markets from investment vehicles to that of hyper-volatile gambling casinos for the well resourced, financially and technically.


Looking at the market from day to day (not to mention hour to hour) has become a meaningless exercise for investors.


As many readers will know Warren Buffet is a fellow who says he purposely does not look at the market on a regular basis given his philosophy and long, long term bias. John Templeton, another legendary investor, however urged people to follow their investments closely, at least implying daily market reviews. But that was in another era.


Tuesday, April 10 the UK and European banking sectors (along with the market overall) took a big hit in part due to very negative news from the Eurozone both with regard to its general economic outlook and the specific problems looming for the banking industry.


Wednesday, April 11and the UK banking sector bounces back strongly. Is anyone aware of anything that happened overnight that favourably altered the banking industry outlook?


RIP the EMH.


Walter Marlowe is the author of the forthcoming Thematic Investing (Searching Finance autumn 2012)

He blogs @

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Last modified on Thursday, 12 April 2012 08:02

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