IFA.com - Efficient Market Hypothesis Explanation

IFA.com - Efficient Market Hypothesis Explanation

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00:00
[Music] professor fama what is the efficient market hypothesis and why is it important to investors it's a very simple concept it says that prices basically reflect all available information so that in a strict view of the theory it would say it's basically impossible to beat them beat the market you're always paying a fair price basically that's the simple concept is
00:35
the prices always price is always fair that's an important concept for investors because says they're always paying fair prices so their task is simplified they basically have just have to decide what kind of risk return trade-off they want to be involved in how much risk they want to take in order to get more or less expected return they don't have to worry about picking stocks because they can operate under the presumption that the stocks will be
01:05
fairly priced it's 1982 the stock market as measured by the sp500 has had a phenomenal run do you believe there will be a reversion to the mean I don't know what you mean by reversion to the mean I'm sure there will be a big negative return right your question is well know what happened what happened after the market triples again tomorrow my expected value always is the historical
01:36
return but they're always downturns they're always up tenth do you call it a correction a correction no that's a bad word correction is only something you can talk about with hindsight an efficient market person never talks about a correction it may it may turn out to be a correction but it wasn't something you would have predicted in advance that's occurred how many people since 1982 have been saying that the market is too high year after year after year I'm glad I stayed in that was one of the benefits of being an efficient
02:07
market for a snowball is day I never got out Rex how do markets price assets nobody knows precisely what causes market to price securities and asset the way it does their opinions are factored in but sir so are the opinions of six billion other people and so the market is the only thing that possesses the implications of all of the information and insight and preferences and actions of all six billion people in the world so you can think of the system
02:39
of market prices as a vast processing machine that takes all this information and brings it together it's the only place where it's brought to bear so you can have one individual who can be very very smart and actually know a little bit more than everyone else but does he know more than six billion people combined know he knows a tiny tiny fraction of what is knowable and what's built into prices professor French what drives stock returns remember stock returns are being driven by risk so it
03:10
can't be gee management's doing some crazy so the expected return from now till forever is lowered oh when the news comes out that management's doing some crazy prices will fall and then you'll go back to whatever your normal expected rate of return is given that firms level of risk [Music] you

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