ENDING: there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient

Markets Hypothesis [Jensen, 1978, 96] The Market is Efficient Investment is simply losing and gaining. If prices are predictable using techniques, then investing will just be about reaping and reaping money making all investors wealthy. But wheres the risky part of the investment if the market behaviour is predictable? We believe that an invisible hand (Smith, 1776), is shaping the market and that no one can consistently beat the market, and thus we strongly believe that Efficient Market Hypothesis (EMH) holds. The Efficient Market Hypothesis (EMH) has been a serious concern for many investors since it was proposed. It claims that stock prices reflect all relevant information. Furthermore, the EMH claims that stock prices follow random walk, i.e. random and unpredictable. An implication to this notion is the inability of investors to predict future stock prices. If investor sees an opportunity to make profit, then they would flock to buy stocks. However, this results to setting the price at fair level giving average returns. A forecast about favourable future performance leads instead to favourable current performance, as market participants all try to get in on the action before the price jump 1. Also, if a stock is already at fair level then the tendency of going up or down is due to new information relevant to it. But news emerges randomly, making stock prices evolve randomly. Some may find patterns in stock prices but this will work for short period of time. Hence, investors may have the chance to beat the market but will not consistently beat the market. Randomness in stock prices does not imply that investment is like a coin toss you are as likely to win or loss. Bodie, Khan and Marcus (2001) claim that portfolio management has a role even in efficient market. Investors optimal positions will vary according to factors such as age, tax bracket, risk aversion, and employment. The role of the portfolio manager in an efficient market is to tailor the portfolio to these needs, rather than to beat the market. Firm-specific risk is present and diversification of portfolio is an aid to eliminate firm-specific risk. As such, some investors outperform others and not because they use certain forecasting techniques. The outperformance can be explained by the higher risks of some stocks that yields higher returns since investors are paid for the risks they take. If prices are predictable using past prices then all investors have lavished these data since price history is publicly available and free. The soft sophisticated techniques may be applied and investors may buy bunch of stocks if prices are predicted to rise up or sell stocks if prices go down. But still, these buy and sell signals will reflect on the prices and subsequently affect the price before its forecasted time of increase or decrease. These signals, moreover, is part of those relevant information that affects the prices of stocks. Time series analysis even advices that one should not put too much confidence on forecast values. Relevant information must be incorporated in forecasting.

Maurice Kendall tried to examine possible patterns in stock prices 1953. But unfortunately, he found nothing2. But 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 returns3.

Bodie, Z.,Kane,A. & Marcus, A.(2001).Investments, 5th Ed.McGraw-Hill Maurice Kendall, The Analysis of Economic Time Series, Part I: Prices, Journal of the Royal Statistical Society 96 (1953). 3 Malkiel, B.G.(2003). The Efficient Market Hypothesis and Its Critics
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Are Markets Efficient?

The question concerning the value of analysis begins with the debate on market efficiency. Just what is represented by the current price of a security? Is a security's current price an accurate reflection of its fair value? Or, do anomalies exist that allow traders and investors the opportunity to beat the market by finding undervalued or overvalued securities? In an efficient market, the current price of a security fully reflects all available information and is the fair value. "All" because the price is the sum value of all views (bullish, bearish or otherwise) held by market participants. It is the fair value because the market agreed on a price to buy and sell the security. As new information becomes available, the market assimilates the information by adjusting the security's price up (buying) and down (selling). In an efficient market, deviations above and below fair value are possible, but these deviations are considered to be random. Over the long run, the price should accurately reflect fair value. The hypothesis further asserts that if markets are efficient, then it should be virtually impossible to outperform the market on a sustained basis. Even though deviations will occur and there will be periods when securities are overvalued or undervalued, these anomalies will disappear as quickly as they appeared, thus making it almost impossible to profit from them.

Strong-form: Technicians
The strong-form of market efficiency theorizes that the current price reflects all information available. It does not matter if this information is available to the public or privy to top management; if it exists at all, it is reflected in the current price. Because all possible information is already reflected in the price, investors and traders will not be able to find or exploit inefficiencies based on fundamental information. Generally, pure technical analysts believe that the markets are strong-form efficient and all information is reflected in the price.

Semi-Strong Form: Random Walkers

The semi-strong form of market efficiency theorizes that the current price reflects all readily available information. This information will likely include annual reports, SEC filings, earnings reports, announcements and other relevant information that can be readily gathered. However, there is other information not readily available to the public that is not fully reflected in the price. This could be information held by insiders, competitors, contractors, suppliers or regulators, among others. Anomalies exist when information is withheld from the public and the only way to profit is by using information not yet

known to the public. This is sometimes called insider trading. Once this information becomes public knowledge, prices adjust instantaneously, so it is virtually impossible to profit from such news. The Random Walk theory is an example of the semi-strong form of market efficiency.

Weak-form: Fundamentalists
The weak-form of market efficiency theorizes that the current price does not reflect fair value and is only a reflection of past prices. Furthermore, the future price cannot be determined using past or current prices (sorry technical analysts). Fundamental analysts are champions of weak-form market efficiency and believe that the true value of a security can be ascertained through financial models using information readily available. The current price will not always reflect fair value, and these models will help identify anomalies.

Which Form Exists in the Market Today?

Many in academia believe that security prices are semi-strong efficient. Recall that semi-strong efficient implies that all public knowledge is reflected in the price and it is virtually impossible to exploit deviations from the true value based on public information. Only new information will affect the price. Judging from the reaction of many stocks to news events, there seems to be evidence to support this case. The flow of information has become faster with the Internet, and surprises are factored in instantly. Few will argue that a surprise, both positive and negative, can violently move the price of a security

http://stockcharts.com/school/doku.php? id=chart_school:overview:why_analyze_securiti

The Efficient Market Hypothesis And its Validity in Todays Markets By Stefan PALAN, Graz, August 2004
The efficient market hypothesis is one of the most important paradigms in modern finance and was largely accepted to hold by the early 1970s. Market efficiency since then has become the basis of numerous financial models and forms the foundation of the investment strategies of many individuals and corporations. 2. What is the Efficient Market Hypothesis? 3 In 1953 Maurice Kendall published a study4 in which he found that stock price movements followed no discernible pattern, that is, they exhibited no serial correlation. Prices were as likely to go up as they were to go down on any given day, irrespective of their movements in the past. These results lead to the question of what, exactly, influenced stock prices. Past performance obviously did not. In fact, had this been the case, investors could have made money easily. Simply building a model to calculate the probable next price movement would have enabled market participants to gain large profits without (or with reduced) risk. On the other hand, if everybody could have done so, stocks that were about to rise would have risen instantly, because large numbers of investors would have wanted to buy them, while those holding the stock would not have wanted to sell. This mechanism suggests that the market prices in the performance data that is already available about a stock.

2.1. Definition of Market Efficiency The concept of efficiency adopted for this thesis is one regarding the incorporation of information into security prices. Generalizing from the results of the above paragraph leads to the proposition that any available information which could influence a companys stock performance should already be reflected in said companys stock price. In an efficient market, therefore, security prices should equal the securitys investment value, where investment value is the discounted value of the securitys future cash flows as estimated by knowledgeable and capable analysts. Under this definition, the one thing that can still influence stock prices is new information. When new information about a company becomes available, the above process makes stock prices move immediately to reflect the new situation. Naturally, this new information needs to be unpredictable; otherwise the prediction about the new information (which is itself a piece of information) would already have caused share prices to change. A good description of market efficiency and the underlying mechanics is the one by Cootner (1964): If any substantial group of buyers thought prices were too low, their buying would force up the prices. The reverse would be true for sellers. Except for appreciation due to earnings retention, the conditional expectation of tomorrows price, given todays price, is todays price. In such a world, the only price changes that would occur are those that result from new information. Since there is no reason to expect that information to be non-random in appearance, the period-to-period price changes of a stock should be random movements, statistically independent of one another. Nevertheless, while perfect markets are a sufficient assumption for market efficiency, they are not a necessary condition. There are three assumptions for the Efficient Market Hypothesis : 1.All investors are independent, rational, well-informed and hope for the highest profit; 2.All information are free and randomly available in the market, thats mean no one can predict any new information. Once the information is released in the market, the price will be responded as soon as possible; 3.There are no taxes or transaction fees in the market.