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Principles of Finance a la shmoop... efficient market theory [Person places briefcase on the floor]

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Well Adam Smith was all about trusting in the market with a belief

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that Mr. market is smarter than we humans are in fact a lot of poor

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professors believe that the market is so efficient that it's impossible to [Person wheeling a shopping cart through a store]

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legally beat it and that we shouldn't try to beat the market that is we should

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just be the market in the form of investing in index funds or ETFs and

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forget about actively managing money in the stock and bond markets the theory

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says that you can't beat Mr. market because all the information is already

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reflected in the stock prices that markets are in fact efficient and that [Chipotle store]

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new information pukes out into the market place like a burp in a small room

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well think you can beat the market because you have some great information [Woman on the phone and police officer appears]

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well sorry champ but this theory claims that the information is already

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affecting the market because others know the info too if it's legal then everyone

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knows at the same time got that yeah better luck next time well there are [Woman thrown into a jail cell]

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three models of the efficient market theory the weak form model, the semi

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strong form model, and the strong form model well in the weak form model passed

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information about a stock isn't useful at all the theory is that the current

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market value is the correct and best reflection of the value of the stock all [Sears stock value graph and Mr Sears appears]

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right in the semi strong form model new public information about a stock is

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instantly reflected in the price so you can't gain any advantage legally by

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using public information all right move it on in the strong form of a model even

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insider information like illegal information is said to already be [Apple executive workers on the phone]

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reflected in the market price because you know thieves tend to collude and

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work together and lots of thieves set the new price on the market well not

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everyone agrees with efficient market theory they may point out that insiders

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can and do earn higher than average returns from trading their own company's

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stock sometimes even legally and they might also point out that there's this [A pile of cash]

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guy Warren Buffett has not only beaten Mr. market but has reduced him to a

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bloody pulp Berkshire Hathaway here's the stock price yeah I'm pretty good huh

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well if the markets really were efficient wouldn't you think that after

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all these years W buff would regress to the mean and stock returns or even the

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nice...yeah ain't happenin even at this massive scale literally millions of [Warren buffett in a bath of money]

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would-be investors have tried to beat the market over this period of time

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maybe 20 have and only one has absolutely crushed it bottom line if you can be

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Michael Phelps you should swim if not well then go to law school [Michael Phelps swims past a man floating in a pool]

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