This is the problem with the efficient markets hypothesis

Oct 22, 2019

The efficient markets hypothesis (EMH) holds that assets are rationally priced by markets as all publicly available information is immediately reflected in prices…in real time.

People like to think that they can identify bubbles, and time them.

But even in the most famous cases of all, rarely have they been able to.

Tech stocks were considered to be in bubble territory in 1996, for example, when the NASDAQ was trading at barely above 1,000.

The index promptly tore up towards 5,000 at the 2000 peak, before finally crashing.

Moreover, tech firms did go on to change the world and the NASDAQ today is trading at well above 8,000.

Bitcoin was a bit the same, when it was called a ‘bubble’ at $30(!), $50, $100, and so on.

Since the financial crisis, some people are now seeing bubbles here, there, and everywhere.

It’s seemingly almost always people that have failed to capture rising markets.

There’s an old saying that a bubble is a bull market you haven’t participated in, after all.

And talking about bubbles does give one a sense of righteousness, and even an air of sophistication (it must be smart to be contrarian, right?).

It’s also all but impossible to prove a bubble call wrong, since there’s always another tomorrow when the market might finally implode.

Overwhelmingly, though, bubble calls have proven to be wrong – or at least far too early – and markets have been rationally priced more often than not.

In saying that, it is possible to recognise market cycles and, accordingly, achieve better than average results.

I discussed why and how you can do this a little further in the short video here

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