When money is placed in the capital markets, it is intended to benefit from the capital invested. Many investors are not only trying to generate a profitable return, but also trying to beat the market.
However, market efficiency, a formula contained in the efficient market hypothesis (HPE), which was discovered by Eugene Fama 1970 work, saying that the price truly reflect all available information on a stock or market in a period. Therefore, according to HPE, no one investor who will get the advantage in predicting stock prices for access to information is available to all.
Efficiency effects: Not Predictive
The information available is not only limited to financial news and research, despite the information on the political, economic, and social events, combined with the attitude of investors in information, whether true or just rumor, will be reflected in stock prices. According to the HPE, no one who has the ability to roll up another person's loss because prices respond only on the information available in the market, and because all market participants have access to the same information.
In an efficient market, price becomes a random move, so it is difficult to predict, so there's no lasting investment patterns. The pattern of price moves randomly generates the failure of an investment strategy that aims to beat the market consistently.
Challenges To Efficiency
In the real world of investing, there are many arguments against the theory of HPE. There are investors who constantly beat the market, such as Warren Buffett, of which investment strategy focuses on undervalued stocks. This strategy succeeded in generating billions of dollars for him and give a lot of followers. There is an investment manager who has a better record than the other, and there are securities that do more research than others. So how can the performance of random when clearly there are people who get the profits and beat the market?
Studies in behavioral finance, which looks at psychological investors on stock prices, suggesting that there are some predictable patterns in stock market. Investors tend to buy stocks that are undervalued and sell overvalued stocks, and in a market with many market participants, the results can be anything but efficient.
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