Efficient Market Hypothesis

A fundamental component of Free Market Investing is the Efficient Market Hypothesis, first explained by Eugene F. Fama in his 1965 doctoral thesis:

An efficient market is defined as a market where there are large numbers of rational, profit-maximizer actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.

Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965. What Free Market Hypothesis means to you, the investor:

  • Recognize that the stock market, the media and popular culture, by and large, encourage behavior consistent with the belief that the market is inefficient. Without a clearly defined investment philosophy, it is easy to be manipulated by media, advertisers and investment professionals eager to sell products.
  • You must understand that there is a choice to be made about how you believe the market works. Do you believe it is efficient or inefficient?
  • Your market belief will guide your investment strategy.

What Free Market Hypothesis means to Pathfinder Wealth Management:

  • Pathfinder believes that markets are efficient. One of our Expressed Convictions is Free Markets Work!
  • Pathfinder focuses on capturing market returns.
  • Pathfinder utilizes asset-class or structured funds.
  • Pathfinder diversifies prudently.
  • Pathfinder eliminates stock picking, track record investing and market timing from the investment process.