Efficient-market hypothesis

His book, Conquering Risk, Attacking Vegas, And Wall Street was one that I had on my shelf many years ago and often consulted.

His latest book is called Beyond the Odds, Efficient Market Theory and Tools of Warfare for the Modern Sports Better.

But more notably for those of us who have bet, he was a modernist.

moderator at SBR under the name Justin Seven, helped so many people so willingly for so many years, and of course was the ghostwriter for the Simon Noble newsletter at Pinnacle back in the day, which I loved and I just inhaled back in the 90s.

By the way, you can follow him on Twitter at D underscore Feustel.

That's F-E-U-S-T-E-L.

Again, his latest book, which is available everywhere, is entitled Beyond the Odds, Efficient Market Theory and Tools of Warfare for the Modern Sports Better.

Elihu Feustel.

I was never one for the efficient market hypothesis that everything is so efficient.

People take the whole EMH stuff way too seriously.

It means that everything is right all the time.

That's not really what it means.

It's robust across different markets.

That's why you got to test all this stuff.

Finally, Bill is an EMH guy, right? Fama in French wrote a paper dissecting anomalies.

This is the one that might get you, Bill.

And I don't know if you've taken an economics degree, but at the time, this concept of the efficient markets hypothesis had become extremely popular in economic circles and in finance circles.

And the idea of the EMH basically, not without going into the theory too much, is like if you create a market in something, it'll just efficientize everything.

That's a fake word, but it'll make everything perfectly efficient.

And, you know, it's kind of like the wisdom of crowds or it's similar kind of thing, like the guy counting the balls and the whatever.

hood.

Dr. Hayes points out that the engine driving this entire phenomenon is something called the Efficient Market Hypothesis, or the EMH.

The Efficient Market Hypothesis.

Okay, that sounds incredibly academic.

The formal definition does sound academic, yeah.

But the underlying concept is surprisingly intuitive.

Okay, break it down for me.

The efficient market hypothesis essentially states that at any given moment, The price of a stock already reflects absolutely all publicly available information about that company.

So around the time you finish your Ph.D., Pharma's efficient market hypothesis, that thesis was starting to gain traction, at least in academia, if not yet on Wall Street.

Tell us a little bit about what was so attractive about EMH.

Well, it was incredibly exciting.

First, let me just make a slight correction.

And that is fundamentally the issue, right, with the SEC.

So they do have fundamentally this theory that all information in the public space is available and shared and reflected in the stock price, right? And that, right, the, what is it, the strong theorem that, you know, that there's no need for fundamental analysis, there's no need for, you know, insider trading, and there's no need for technical analysis because all information is fundamentally That's what is it, the EMH theorem that is all fundamentally in the marketplace.

So fundamentally, when you when you look at the SEC, they the reason that they even have shelf registration is because they believe that the information is fundamentally publicly available and shared evenly.

And that's not true.

Right.

Which brings us to the efficient market hypothesis, or EMH.

This academic theory basically says the market is this perfectly rational, hyper-efficient calculating machine

If we connect this to the bigger picture, EMH was the absolute baseline for academic finance for decades.

The premise is that the second new information drops, like an earnings report or a supply chain issue, thousands of rational actors instantly price it into the stock

So the stock is always supposedly trading at its exact fair value

So finding an undervalued company is mathematically impossible under this theory.

It makes trying to beat the market completely pointless