The efficient market hypothesis is, in general, a good rule when it comes to the market. Most stocks are efficiently priced, and most inefficiencies or arbitrages are quickly whittled away. This is especially the case when it comes to large asset classes, as a growing number of total assets under management (AUM) is chasing down the alpha with bigger computers and more brains. It’s a war for information.
I don’t fight this war. Mainly because I can’t win, and it’s too difficult. But when it comes to market efficiency, you have to believe there are opportunities out there. There’s a running joke in economics about the professor and student walking down a path. The student spots a £20 note lying on the pavement and shouts in glee. The professor retorts: “Nonsense! If it was truly lying there for anyone to take, someone would’ve taken it already.” The professor walks by it, and the student pockets the £20 and buys a round of drinks for his friends.
If you stick to the markets being efficient as a solid rule, you’ll miss the best risk/reward trades out there. Back in February 2020, I talked myself out of shorting the market when Covid was sweeping into Italy. I figured that if Covid was a problem, then everyone would already be shorting. As it happens, they weren’t – and we saw the biggest volatility decline in history.