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So the idea is that in an efficient market, all the information in the market is already factored into the actual price of the stock. If the market has rich in

So the idea is that in an efficient market, all the information in the market is already factored into the actual price of the stock. If the market has rich information, then it's very good at telling you what companies are good, but that doesn't help you actually invest in them -- because that information is already in the price of the stock. In other words, when you're buying a stock, you don't actually care about whether the company is in an absolute sense good or bad, you care about whether it's relatively better or worse than what other investors think it is. In a perfectly efficient market, the answer is basically that it's always exactly as good as other investors think it is. Then your returns are based on random unpredictable shocks and the total trend of the market. In a truly perfect market, it wouldn't matter what you invested in -- everything would have the same return. Your only real choice would be to invest narrowly or broadly, for risk/reward.

ameister14 12y ago
Even with perfect current information, you can't necessarily predict future performance. So it's not that everything would have the same return. I think that the randomization would come to play in evaluating growth stocks because you'd have the same understanding as everyone else and simply decide to gamble on risk vs reward. I wouldn't attribute the growth or collapse to random shocks, though those would of course play a role. I'd say that new products and distribution methods would still cause rapid and somewhat unpredictable growth or collapse. Straight value investing would be more difficult with perfect transparency and efficient information, though it might work out as a dividend thing.
- aetherson 12y ago
  Yes, sorry, we're saying the same thing, but I phrased it badly. All stocks in a perfectly efficient market have the same EXPECTED return -- differential behavior can and will still occur, but it is necessarily unpredictable. Investing in any one stock is as good as investing in any other stock, in terms of expected returns. Now, there's still room for strategy in such a market: it's like, imagine the difference between betting $1 on a fair die, with one of two possible betting options: Either a 1-5 gets you nothing and a 6 gets you $7, or a 1 gets you nothing, a 2-4 gets you your $1 back, and a 5-6 gets you $2. In both cases, your expected return is 16% gain -- over enough iterations, you'll expect to gain money. But they are different in terms of risk/reward. (And you can get similar risk/reward tradeoffs by investing broadly or narrowly in a perfectly efficient market.)

ameister14 12y ago

Even with perfect current information, you can't necessarily predict future performance. So it's not that everything would have the same return. I think that the randomization would come to play in evaluating growth stocks because you'd have the same understanding as everyone else and simply decide to gamble on risk vs reward. I wouldn't attribute the growth or collapse to random shocks, though those would of course play a role. I'd say that new products and distribution methods would still cause rapid and somewhat unpredictable growth or collapse. Straight value investing would be more difficult with perfect transparency and efficient information, though it might work out as a dividend thing.

aetherson 12y ago
Yes, sorry, we're saying the same thing, but I phrased it badly. All stocks in a perfectly efficient market have the same EXPECTED return -- differential behavior can and will still occur, but it is necessarily unpredictable. Investing in any one stock is as good as investing in any other stock, in terms of expected returns. Now, there's still room for strategy in such a market: it's like, imagine the difference between betting $1 on a fair die, with one of two possible betting options: Either a 1-5 gets you nothing and a 6 gets you $7, or a 1 gets you nothing, a 2-4 gets you your $1 back, and a 5-6 gets you $2. In both cases, your expected return is 16% gain -- over enough iterations, you'll expect to gain money. But they are different in terms of risk/reward. (And you can get similar risk/reward tradeoffs by investing broadly or narrowly in a perfectly efficient market.)