Stock Markets Exposed

What are the pros and cons of the efficient market theory?

I am a finance major in school and was recently talking to an investment professional and he was expaining to me that value investing is impossible because the stock market is totally efficient. In my studies I have read that Benjamin Graham and Warren Buffet became successful by value investing. I just don't don't think the stock market can but completely efficient, even if every bit of information was available to everyone.

Public Comments

1. The key is how the information is interpreted. Some people hear news and choose to be agressive and buy. Some hear the same news and choose to be conservative by either holding or selling. Only one person can be right!
2. You likely know more than an "investment professional" when it comes to this becase they generally are sales monkeys and not students of the markets. And as for the market being totally efficient - tell the stock monkey to look up the trading pattern of RIMM and tell us that it is traded efficiently. It is run by market makers and institutions.... not very efficiently by the way. Good luck.
3. Buffett and Graham actually believe that the market is SEMI-efficient, meaning that in most cases, the investing public is right about their valuations of stocks, and all available information about companies is correctly discounted in the prices, but also that there are at least a few cases where the market is WRONG. They profitted from these opportunities. Sometimes, due to market swings or investor's ignorance, the price of a stock (or bond) does not accurately reflect the value of the stock (or bond), and it was in these instances that Buffett and Graham made a killing. Also, if one takes the time to learn about a company, he/she should know three times as much as the average shareholder, and will be able to find mispriced stocks based on his/her superior knowledge.
4. You are 100% correct in the assumptions regarding value investing. Unfortunately, you did not go to a good source. 1st Go ask your investment pro why Barrons publishes the odd lot index. The underlying theory is that small investors buying 1-99 shares don't know what the heck they are doing. 2nd, ask the professional about how much commission he makes when you do all your own trades and research. Dont trust the investment professional. There is no such thing. A stockbroker is a salesperson vying for your money so he can slam you in to annuity or mutual fund that pays him money.
5. Personally, I am not a fond believer in the efficient market theory. Psychology plays too important a role in stock prices for the market to be efficient. Just one recent example should suffice. Several days ago Greenspan said that the Chinese market was overpriced and Chinese stocks immediately dropped about 2 to 4%. During the next two days they recovered much of their previous loss. Does that sound efficient to you? It did however present a great buying opportunity.
6. None. It is just that - a theory. That's what you do when you can't make $$ in the market.
7. Hi, i recommand you a good and basic tutorial for investing. it covers all Issues related to your Investing and everything around it. http://www.investingtutorial.info/ wish it will help you. Good Luck , Best Wishes!