My Take on the Efficient Markets Hypothesis

For the most part markets are efficient and the accumulation of individuals influencing the price through their opinions often leads to an accurate valuation. However, there are certainly times when consensus opinion is inaccurate in correctly evaluating an equity. These examples represent opportunities for investors to take advantage of the inefficiencies of the market.

As a money manager, I would take advantage of these inefficiencies in the market by not allowing myself to be affected by excess optimism or pessimism regarding a stock. Instead, I would take advantage of irrational dips in price. I would fill the portfolio with diverse companies that have shown a strong ability to generate cash, are investing in their growth, have low debt to equity ratios, and low P/E ratios to prove that I am buying them at a cheap price. If I am interested in investing in a strong company that has proven an ability to generate strong profit in the recent past I will become excited when the company faces turmoil that drops the price. I will investigate the specific turmoil that the company is facing and if I decide that the event either does not have a material effect on the future earnings potential of the company or that a strong management team loaded with cash will be able to overcome the hurdle I will happily invest in a strong stock at a discounted price. In this situation, I would be taking advantage of the inefficiencies of the market and unwarranted pessimism.

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