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Essay example - Portfolio Management
Finance & Accounting
Pages 3 (753 words)
Efficient Market Theories According To Warren Buffett Name Institution Weaknesses of the Efficient Market Theory Anyone who invests in the stock market expects to have a return on the principal invested. Assuming that the efficient market way of thinking is correct, then no individual, group or organization can ever expect to outperform the stock market, except by random chance…
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This obviously shows that this theory is not entirely correct. The theory further interpreted shows that investors who thoroughly analyse the market are wasting their time. This theory was coined from the belief that, since the market was often efficient, then it was always efficient. This is however, not always true (Hagstrom, R. 2001, 158). The efficient market theory by Eugene Fama bases its argument on a number of assumptions. First is that all investors rationally seek to maximize the value of their investments. This means that the information that investors receive on their stock investments can make them react randomly either by overreacting or vice versa. This goes to say that they cannot be predicted or exploited thereof for the purpose of making a profit. Secondly, investors have easy and free access to information and can easily buy or sell stocks without breaking sweat. Third is that, all investors in the stock market are in it to make money. This is true to some extent. Based on these assumptions, one can conclude that all the information that people have that can affect stock prices is irrelevant since it has already affected the price (Hough, J. 2008, 26 -27). ...
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