The Efficient Market Hypothesis (EMH) is a financial economic theory that asserts financial markets incorporate all available information regarding asset prices at any moment. Developed by economist Eugene Fama in the 1960s, the theory posits that it is nearly impossible for investors to consistently outperform the market over time. Assets are expected to be priced fairly, as all known information will be traded until it no longer holds value.

When discussing efficient markets, theorists categorize available information into three levels: weak, semi-strong, and strong.

Weak

The weak form suggests that current prices reflect all historical data, rendering technical analysis ineffective. However, it does not dismiss other types of information and acknowledges that methods like fundamental analysis or thorough research can still provide an advantage.

Semi-Strong

The semi-strong form asserts that all public information, such as news and company statements, has already been incorporated into asset prices. Proponents of this view argue that even fundamental analysis cannot provide an edge. The only way to gain an advantage is by utilizing private information that is not yet public.

Strong

The strong form claims that both public and private information is reflected in an asset’s price. This includes historical performance and insider data. According to this perspective, there is no way for any market participant to gain an advantage with any type of information, as the market will have already accounted for it.

While EMH is a well-established theory, it faces criticism. Empirical evidence has not definitively proven or disproven the hypothesis, but many critics argue that emotional factors contribute to the undervaluation or overvaluation of financial assets. Despite being a fundamental aspect of modern financial theory, EMH remains highly contentious and frequently debated.

Supporters of the Efficient Market Hypothesis conclude that due to market randomness, investors may achieve better results by investing in a low-cost, passive portfolio. Conversely, opponents of EMH contend that it is possible to outperform the market and that stocks can stray from their fair market values. Theoretically, neither technical nor fundamental analysis can consistently generate risk-adjusted excess returns (alpha), and only insider information can lead to significant risk-adjusted returns.