Fundamental Analysis And The Efficient Market

Fundamental analysis for stocks reflects the idea that undervalued stocks can be found and invested in to create superior performance. In order for fundamental analysis to work, the market would have to be inefficient. The efficient market hypothesis maintains that all publicly known information is quickly reflected into the price of stocks and therefore markets are efficient. This theory is also referred to as the random walk theory and suggests that a random stock selection is as good as any other method.

The semi-strong form of the efficient market theory uses the concept that enough investors attempt to use the publicly available information to their advantage that it creates a situation where no advantage ends up being available to anyone.

While the existence of asset bubbles, such as the dot com and housing, do not reflect an extremely efficient market, and it is true that some users of fundamental analysis such as Warren Buffet regularly outperform the market, it is also true that the majority of actively managed mutual funds underperform the market(1)(2)(3). The odds do not favor a successful fundamental analysis approach to investing over an efficient market approach.

1)https://www.fool.com/investing/2016/08/27/index-funds-vs-mutual-funds.aspx

2)http://www.lyxor.com/fileadmin/user_upload/pdf/Active_vs_passive_-_Septembre_2015.pdf

3)http://www.marketwatch.com/story/index-funds-beat-active-90-of-the-time-really-2014-08-01

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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