What underpins your disbelief? Here is a good paper by Burton Malkiel on the subject and his response to various criticisms of the EMH.
https://www.princeton.edu/ceps/workingpapers/91malkiel.pdf

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As long as stock markets exist, the collective judgment of investors will sometimes make mistakes. Undoubtedly, some market participants are demonstrably less then rational. As a result, pricing irregularities and predictable patterns in stock returns can appear over time and even persist for short periods. Moreover, the market cannot be perfectly efficient or there would be no incentive for professionals to uncover the information that gets so quickly reflected in market prices, a point stressed by Grossman and Stiglitz (1980). Undoubtedly, with the passage of time and with the increasing sophistication of our databases and empirical techniques, we will document further apparent departures from efficiency and further patterns in the development of stock returns.

But I suspect that the end result will not be an abandonment of the belief of many in the profession that the stock market is remarkably efficient in its utilization of information. Periods such as 1999 where "bubbles" seem to have existed, at least in certain sectors of the market, are fortunately the exception rather than the rule. Moreover, whatever patterns or irrationalities in the pricing of individual stocks that have been discovered in a search of historical experience are unlikely to persist and will not provide investors with a method to obtain extraordinary returns. If any $100 bills are lying around the stock exchanges of the world, they will not be there for long.

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If you don't believe in efficient markets, what framework do you believe in? Do you disagree that prices reflect the aggregate expectations of investors? Do you believe markets are efficient over the long-term, but that there is a slow dissemination of information which allows for those investors willing to act quickly to gain an edge? Again, if you don't believe in the EMH framework at all, what alternative framework do you base your investment philosophy on?

Behavioral finance and fat-tailed distributions (also called Levy-stable).

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Behavioral finance and fat-tailed distributions (also called Levy-stable).

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Which aspects of behavioral finance do you believe assail the EMH? Keep in mind, I'm speaking of weak-form EMH rather than strong or semi-strong.

Also, I don't see why fat-tailed distributions disproves the EMH. Fat tails are a reflection that low-likelihood, high consequence events exist. For example, global nuclear winter is thankfully low-likelihood, but should it occur, would be extremely destructive (duh). Why would it necessarily be the case that efficient markets should only exhibit a normal distribution?

The best example would be companies that fail without warning. Like Enron, etc. If the market were efficient, it would know and price it in.

I don't believe that I am capable of beating the market long term. But I believe that some can. I think Yale's endowment is a good example of this. Or Warren Buffet's ability to create opportunities in equities for himself. But I'm not an expert. My retirement equity funds are with Vanguard for this reason, and I have a bit of money in individual stocks that I call my "play fund".

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The best example would be companies that fail without warning. Like Enron, etc. If the market were efficient, it would know and price it in.

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That's the strong-form version of EMH. It's well-accepted that insider information does indeed give an investment edge.

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I don't believe that I am capable of beating the market long term. But I believe that some can.

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I'm not opposed to the idea that there may be a small cadre of elite investors capable of such things. Ray Dalio is a prime example.

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I think Yale's endowment is a good example of this. Or Warren Buffet's ability to create opportunities in equities for himself.

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Swensen wrote a book explaining why his approach would be very unlikely to work for others because it requires identifying investment opportunities no one else has figured out. Also, Buffet has left instructions that his heirs invest his estate 90% in an S&P index fund and 10% in short term high quality bonds. They both accept weak-form EMH, for what that's worth.

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My retirement equity funds are with Vanguard for this reason, and I have a bit of money in individual stocks that I call my "play fund".

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Good to hear. Vanguard offers some of the best solutions and products available. I see lots of clients who keep a "play money" account to do what you're describing. As long as it doesn't affect your financial goals one way or the other, there's nothing wrong with it. However, I bet if you did manage to outperform the market with your picks you wouldn't be so bold as to call yourself a guru or suggest it was skill that led to your outperformance.

I have a play money account. In the last year I have grown it 88.8%. Obviously, that performance is my expectation going forward, and I would call myself an investment guru.

I'm not an expert by any means, so my apologies in advance if this is disagreeable:

Herding/overreaction is what I believe causes short-term mispricings -- mostly from unrelated "bad" or "inaccurate" news. I recall before there was a false report that an airline went bankrupt & all airline stocks sank. Even stocks outside of energy (McDonald's, for example) being too closely correlated to oil prices seem irrational to me. EMH relies mean-variance for its Sharp ratio measure of risk. But the mean isn't reliable in a non-normal distribution & the standard-deviation itself is volatile.

For irrational exhuberance of optimism, we have the Dot-Com bubble where some equities didn't match their correct intrinsic value of zero.

The only argument against efficient markets revolve around the time it takes to be efficient and if there are barriers to maximum efficiency. Every action, collapse of Enron included, is a result of efficient markets.

To argue otherwise, in my opinion, is to argue that eventually Newton's apple would have levitated.

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I have a play money account. In the last I have grown it 88.8%. Obviously, that performance is my expectation going forward, and I would call myself an investment guru.

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Your next move should be to immediately open a hedge fund, tout your investment philosophy, and invest other people's money instead of your own. All the reward, none of the risk.

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I'm not an expert by any means, so my apologies in advance if this is disagreeable:

Herding/overreaction is what I believe causes short-term mispricings -- mostly from unrelated "bad" or "inaccurate" news. I recall before there was a false tweet that an airline went bankrupt & all airline stocks sank. Even stocks outside of energy (McDonald's, for example) being too closely correlated to oil prices seem irrational to me. EMH relies mean-variance for its Sharp ratio measure of risk. But the mean isn't reliable in a non-normal distribution & the standard-deviation itself is volatile.

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Mean-variance is actually applied to MPT (modern portfolio theory) which relies heavily on the capital asset pricing model. Not saying this is necessarily in conflict with EMH, but it's a part of a separate framework.

However, I don't disagree that there have been periods which seem to exhibit irrational exuberance with the benefit of hindsight. I'm not as strident as Fama, who doesn't even believe in asset bubbles, for example. The question is whether there are identifiable patterns or trends that we can profit from above and beyond the market return net of implementation costs and taxes. Often, people beat the market for periods of time and become more and more convinced they know something the rest of the market participants don't know. The problem is that this is incredibly hard to do consistently, if it can be done at all.

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For irrational exhuberance of optimism, we have the Dot-Com bubble where some equities didn't match their correct intrinsic value of zero.

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I agree that with the benefit of hindsight, the tech wreck appears to have been a period of irrational exuberance.

Would you have been able to adhere to a value strategy throughout the late '90's even though year after year your returns were getting crushed by pretty much everyone else you knew? For example, risk parity portfolios make a ton of sense for the right kind of investor. However, it only makes sense as a strategy if you can maintain discipline in the face of seemingly-endless underperformance. If you held onto such a strategy through the bottom of the downturn, you would have done very well... but most investors would have abandoned that strategy in favor of a portfolio of growth stocks in the years preceding the crash if they are being honest with themselves.

Just as an aside, I'm not sure the existence of asset bubbles is a sufficient refutation of the efficient market hypothesis.

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The only argument against efficient markets revolve around the time it takes to be efficient and if there are barriers to maximum efficiency. Every action, collapse of Enron included, is a result of efficient markets.

To argue otherwise, in my opinion, is to argue that eventually Newton's apple would have levitated.

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Typically, it's argued that various anomalies which have been identified over certain time frames refute efficient markets. A lot of the time when people argue about efficient markets, they are really just quibbling over the definition of efficient markets.

I agree there is a hindsight bias. It makes it even more amazing that Michael Burry stuck with his value strategy in the 90's when it wasn't en vogue. This is why I've replaced discretionary trading with system trading to hopefully arbitrage emotional herding of others.

I wish you nothing but luck with your trading.

I guess over the long term I believe in efficient markets but day to day there is so much HIgh Frequency bull**** and computers at war with each other doing much of the trading volume.

So much "market activity" isn't human driven and happens in less than a second.

I'm pretty sure people have figured out how to manipulate the market into flash crashes to create opportunities. Computers fish for stops, etc

Castles in the sky.

Prices move much more frequently than new information is introduced.

Also, it assumes market participants are rational, and humans are anything but according to every behavioral study ever.

Also, the objective of the most influential market participants isnt efficiency. Managers just want to match index returns and they get a gold sticker and keep their job, this promotes inefficiency and herd mentality.

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Castles in the sky.

Prices move much more frequently than new information is introduced.

Also, it assumes market participants are rational, and humans are anything but according to every behavioral study ever.

Also, the objective of the most influential market participants isnt efficiency. Managers just want to match index returns and they get a gold sticker and keep their job, this promotes inefficiency and herd mentality.

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Leaving aside it doesn't assume market participants are rational, what should managers compare themselves to if not an index?

What does market efficiency mean to you?

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In financial economics, the efficient-market hypothesis (EMH) states that asset prices fully reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information or changes in discount rates (the latter may be predictable or unpredictable).
The EMH was developed by Professor Eugene Fama who argued that stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by chance or by purchasing riskier investments. His 2012 study with Kenneth French confirmed this view, showing that the distribution of abnormal returns of US mutual funds is very similar to what would be expected if no fund managers had any skilla necessary condition for the EMH to hold.
There are three variants of the hypothesis: "weak", "semi-strong", and "strong" form. The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong form of the EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong form of the EMH additionally claims that prices instantly reflect even hidden "insider" information.
Critics have blamed the belief in rational markets for much of the late-2000s financial crisis. In response, proponents the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals.

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This hypothesis kind of reminds me of the quote ""democracy is the worst form of government, except for all the others."

I think it obvious on it's face that the market doesn't fully reflect all available information but I agree with the concept at least that the market is the best approximation of efficiency if we consider efficiency to be a mythical objective pricing of stocks related to information available.

Human bias, irrational exuberance, bandwagon jumpers, uninformed or less than perfectly informed traders all in my mind refute any idea of an absolutely efficient market. It seems most objections would all be quibbling over how fully the market reflects different information and what threshold one would consider it efficient.

I'm a complete non expert on the subject however but thought I'd weigh in anyway. I'm probably just not understanding the hypothesis correctly.

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I think it obvious on it's face that the market doesn't fully reflect all available information

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Why do you say this? What available information isn't priced into markets?

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Castles in the sky.

Prices move much more frequently than new information is introduced.

Also, it assumes market participants are rational, and humans are anything but according to every behavioral study ever.

Also, the objective of the most influential market participants isnt efficiency. Managers just want to match index returns and they get a gold sticker and keep their job, this promotes inefficiency and herd mentality.

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Leaving aside it doesn't assume market participants are rational, what should managers compare themselves to if not an index?

What does market efficiency mean to you?

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I think markets are efficient in that if knowledge of an inefficiency becomes know, it is eventually eliminated, this is obvious. But I think they are not efficient in that when an inefficiency or better investment method is found, it is not shared (except for studies by academics).

Like another poster said, it is often semantics, but ultimately the price ends up at one based on the sum the market participants opinions and behaviors. Value is dependent on individuals. But if we take 2008 as an example, there was public information that these mortgage backed securities were high risk, yet the rating agencies gave them rated them as really low risk. Basic herd mentality built up the bubble where investors just look at a few others opinions about a security and not at the actual security itself. Managers then have an out, if it does bad and they own it "well everyone thought it was good" and if it does well but they don't own it they have to explain why not. It's less career risk and less scrutiny to just follow the herd.

One analysts or bank changes their rating on a stock and the stock moves a few percentage points... yet nothing about the company changed just one persons opinion, and participants follow along and buy or sell.

Also, because the future is unpredictable, it's hard to increase efficiency. It's not like engineering or a manufacturing process where you can measure inputs and outputs in a controlled environment and you get what you get. I think a lot of success is survivorship bias.

Also, indexes themselves are stock picking methods, they just happen to be really good ones.

So yes markets can react quickly to new information and eliminate inefficiency that becomes public, but I also think herd mentality, human behavior and inability to predict the future creates inefficiency.

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I think it obvious on it's face that the market doesn't fully reflect all available information

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Why do you say this? What available information isn't priced into markets?

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2008 mortgage risk.

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2008 mortgage risk.

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It does appear to me that the best argument against EMH is one-off events like 2008. Event-driven investment funds seem the most likely to offer out-performance opportunities. The question then becomes can you identify these events ahead of time in order to profit from them.

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The question then becomes can you identify these events ahead of time in order to profit from them.

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And can you time it and stay solvent while the market remains irrational.

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I think markets are efficient in that if knowledge of an inefficiency becomes know, it is eventually eliminated, this is obvious. But I think they are not efficient in that when an inefficiency or better investment method is found, it is not shared (except for studies by academics).

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This goes back to the discussion of Yale's investment manager, Swensen. His work indicates that original research can provide opportunities to beat the markets when no one else has access to that information. However, there is an open question regarding his results: are they reflective of consistent market out-performance, or was he being paid a liquidity premium for allocating to very illiquid investments?

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Like another poster said, it is often semantics, but ultimately the price ends up at one based on the sum the market participants opinions and behaviors.

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This is essentially the definition of efficient markets.

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Value is dependent on individuals.

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Sure, but for every buyer there is a seller. If a security was obviously overpriced, the conviction off the seller would only increase as the price increased such that he would be more interested in selling at those prices than the buyer would be to buy at those prices... thus pushing the price back down.

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But if we take 2008 as an example, there was public information that these mortgage backed securities were high risk, yet the rating agencies gave them rated them as really low risk.

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There was a lot of uncertainty regarding the risk of these securities preceding the crash. I would certainly agree that ratings agencies and various investors were incredibly surprised by how wrong they were regarding the safety of the underlying collateral in these securities.

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Basic herd mentality built up the bubble where investors just look at a few others opinions about a security and not at the actual security itself. Managers then have an out, if it does bad and they own it "well everyone thought it was good" and if it does well but they don't own it they have to explain why not. It's less career risk and less scrutiny to just follow the herd.

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I definitely agree with this. Managers have to balance their investment convictions with career risk, which is why you see so many closet indexers in the world of active management. It's a serious problem in our industry which you see market forces working to correct. The extent of outflows of actively managed funds into low-cost market-based solutions is pretty astonishing.

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One analysts or bank changes their rating on a stock and the stock moves a few percentage points... yet nothing about the company changed just one persons opinion, and participants follow along and buy or sell.

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You are arguing that new information causing price movement assails the EMH?

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Also, because the future is unpredictable, it's hard to increase efficiency. It's not like engineering or a manufacturing process where you can measure inputs and outputs in a controlled environment and you get what you get. I think a lot of success is survivorship bias.

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Survivorship bias is a huge problem in the actively-managed world -- especially in hedge funds. However, we see models updated all the time to refine the outputs. For example, the 3 factor model popularized in the early 90's by Fama and French was later refined into their 5 factor model to incorporate new academic work.

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Also, indexes themselves are stock picking methods, they just happen to be really good ones.

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An index is merely a list put together by a committee. It is imperfect, but surely the best way to compare the risk/return metrics of investment managers. What can be a problem is comparing inappropriate indexes to your investments. For example, many people want to compare their portfolio to the S&P 500 even though they balanced between stocks and bonds and globally diversified.

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So yes markets can react quickly to new information and eliminate inefficiency that becomes public, but I also think herd mentality, human behavior and inability to predict the future creates inefficiency.

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Can you think of a way to predictably and consistently profit from these anomalies?

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The question then becomes can you identify these events ahead of time in order to profit from them.

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And can you time it and stay solvent while the market remains irrational.

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On top of this, can you maintain conviction in the face of under-performance year after year while pursuing these above-market profits? It's clear that with the benefit of hindsight, overvalued markets can stay overvalued for extended periods of time.

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2008 mortgage risk.

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It does appear to me that the best argument against EMH is one-off events like 2008. Event-driven investment funds seem the most likely to offer out-performance opportunities. The question then becomes can you identify these events ahead of time in order to profit from them.

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The problem with identifying events like the 2008 mortgage meltdown is the difficulty in forecasting correlation among assets. In my opinion, this is what separates a guy like Dalio from almost everyone else. Somehow he's been able to construct what has to be very close to a global mean-variance optimal portfolio.

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The problem with identifying events like the 2008 mortgage meltdown is the difficulty in forecasting correlation among assets. In my opinion, this is what separates a guy like Dalio from almost everyone else. Somehow he's been able to construct what has to be very close to a global mean-variance optimal portfolio

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I think there are other problems besides this, but I do agree that varying correlations presents a problem. Consider how distraught investors would be if they invested heavily in high-quality fixed income in anticipation of a stock market collapse just to find out bonds were no longer exhibiting negative correlation.

Doesnt the efficient market hypothesis say that it isnt that some investors can't beat the market some of the time. It is more that the likelihood of beating the market over the long run is basically zero?

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Doesnt the efficient market hypothesis say that it isnt that some investors can't beat the market some of the time. It is more that the likelihood of beating the market over the long run is basically zero?

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From the paper I posted in the OP:

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The efficient market hypothesis is associated with the idea of a "random walk," which is a term loosely used in the finance literature to characterize a price series where all subsequent price changes represent random departures from previous prices. The logic of the random walk idea is that if the flow of information is unimpeded and information is immediately reflected in stock prices, then tomorrow's price change will reflect only tomorrow's news and will be independent of the price changes today. But news is by definition unpredictable and, thus, resulting price changes must be unpredictable and random. As a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by the experts.

The way I put it in my book, A Random Walk Down Wall Street, first published in 1973, a blindfolded chimpanzee throwing darts at the Wall Street Journal could select a portfolio that would do as well as the experts. Of course, the advice was not literally to throw darts but instead to throw a towel over the stock pages that is, to buy a broadbased index fund that bought and held all the stocks in the market and that charged very low expenses.

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One of the best arguments against EMH is the existence and persistence of the momentum effect. It continues to baffle many academics in finance, but most have accepted its existence and incorporate it as they would the value, profitablity, size, etc. effects.

I don't believe markets can be anything more than weak-form efficient due to various anomalies, but I unless I can identify an anomaly I can profit from it does me no good. Momentum is the only profitable and persistent anomaly I can think of that makes little to no economic sense given the frame work of efficient markets.