Friends,
I have a very basic (and perhaps a stupid) question -
In what way EMH and value investing contradict each other ? Do they indeed contradict each other ?
Has anyone done any research / book / article / paper ? on how it is difficult to reconcile EMH with Value investing ?
http://www.amazon.com/Intelligent-Investor-Definitive-Investing-Practic…
http://en.wikipedia.org/wiki/Efficient-market_hypothesis
I work for a value shop in ER, but have spent more time in academia with undergrad in finance and an MBA. The key thing in this question to realize is that both sides will answer the question differently. From my perspective, the market is not perfectly efficient for every security, particularly as the market cap decreases (this seems to be a pretty common opinion among practitioners that I've heard/seen).
From the academic side, though, their answer will always be that value investing doesn't produce "above average risk-adjusted returns in the long run". The part in quotations is the key. If presented with a strategy that does, on the surface, appear to be above average, the EMH proponent will say "You're not properly reflecting risk", or "You're using the wrong benchmark."
Either way, the debate will continue to rage on, with both sides having their own views that can be quite difficult to reconcile.
I don't want to be rude but if you don't see how the two contradict each other you don't have a very good understanding of either.
If the semi-strong form or the strong form of the EMH holds, then value investing (assuming this is the same as fundamental analysis) is a waste of time (as of course is technical analysis, which is also worthless if even the weak form of the EMH holds).
IMHO the EMH is completely useless as a framing point for analysis. fama argues the level of efficiency of a market is determined by whether current prices are reflective of fundamental value i.e. the asset price in a market given perfectly symmetric information. well there is no absolute measure of fundamental value because value is a perception and information regarding future events cannot be known for certain. therefore the level of efficiency in a market is immeasurable because current prices are by very definition the aggregate of all perceptions of value in the market. is it possible to beat the market using a strategy like value investing? the EMH argues even if a profitable strategy exists, it is possible to attain this by being in the upper tail of the normal distribution so the result is insignificant. the EMH cannot be proven or disproven because of these facts and hence it is useless as a scientific theorem (see popperian falsifiability). /rant
I like you because you're intelligent.
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