Why The Efficient Market Hypothesis is Bogus

The efficient market hypothesis and the random walk theory are bogus, yet widely accepted in the financial community. Never the less all professional traders and investors realize that they do not hold any truth, partly because they would not exist if it did.

The efficient market hypothesis states that the odds of a stock going up are exactly the same as the odds of a stock going down. This means both fundamental analysis and technical analysis are wothless, and you cannot beat the average return in the stock market for an extended amount of time.

Of course this is a false idea. And here is the reason, stocks trend.

If the markets were efficient the odds of a stock consistently trending lower would be almost non-existent. Trends of more than a few days would be a fluke of nature.

That isn’t saying that a trend could not occur, they could occur every once and a while on random stocks. But they are a common occurrence in the market, I could easily pull up hundreds or thousands of examples of stocks trending for months or even years. It just happens too often for it to be a coincidence.

Since you cannot disprove the fact that stocks do indeed trend you could always try to say it is because of an unusual circumstance such as abnormal growth or panic selling. But the second you try to explain why a stock trends you are disproving that the stock market is efficient.

Ok, let’s talk money. The SPY is considered to be the market average and according to both the efficient market hypothesis and the random walk theory it cannot be beat for a long period of time. In the past the SPY has moved up an average of 10% a year, and if you take the last 10 years into consideration it is lower than that.

But let us compare this 10% average to big traders and other investors who have attempted to catch these trends.

First up, long term investors. Investors look at a company’s fundamental data such as cash flow, earnings, and so on, to determine which companies are likely to trend higher. Two of the biggest investors are Warren Buffet and George Sorros. So how did they do over a long period of time?

Warren buffet has made an average of 25% return over a 44 year period.

George Sorros has made an average of 30% return over a 39 year period.

Both investors were able to over double the markets return for 40 years. If that does not show that the markets cannot be beaten I would love to hear why not.

Next let us look at technical traders. Traders attempt to catch a trend and ride it up until it stops. Most do not care about anything other then what they can see on the chart. So how have they done?

David Harding has made an average return of 22.02% over a 10 year period.

Ed Seykota has made an average of nearly 60% over a 10 year period.

The Turtle traders made an average of 80% over a 4 year period.

Once again this shows that you can beat the average return in the stock market. In fact the turtle traders made an average of 8 times what they were expected to according to the efficient market hypothesis.

How can traders such as these along with countless others beat the market? By using both technical ,and fundamental analysis to give them some sort of an edge. If it did not work every one of these stock market experts would have made an average return of around 10%. It just goes to show you, Don’t believe everything you hear and always think twice to see if something really does make sense.

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