".....these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore, calculations of business value - and even thought itself - were of no importance in investment activities. We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection - than to have opponents who have been taught that thinking is a waste of energy? .. it's like telling a bridge player that it doesn't do any good to look at the cards."
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Although business performance is likely to be far from fixed or stable, most listed companies have an average price variation in the course of a 12-month period of about 40 to 50 percent (meaning that the difference between the 12-month high and low prices is about 40 to 50 percent of the low price). One would need to be exceedingly credulous to believe that, on average, the value of a business varies by 40 to 50 per cent every 12 months.
When a stock market falls 10 per cent or more overnight, does this mean that the value of all businesses comprising the market decclines by an average of 10 per cent while we sleep? When the Australian market fell 50 per cent in 51 days in 1987, was market pricing correct both before and after prices declined?
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However, one should not assume that the market is always wrong. In fairness to believers in EMH, it should be acknowledged that mispricing also results from
- accounting fraud,
- profit misrepresentation,
- a company's false or incorrect profit projections and
- recommendations of analysts that on occasion have been shown to be intentionally fraudulent.
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