Efficient Market Hypothesis


What is an Efficient Market?

“An efficient market is defined as a market where there are large numbers of rational, profit-maximizers 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.

Most investors do not realize that there is a choice to be made about market efficiency, nor that this decision significantly affects investment strategies. Without this knowledge, it is easy to be manipulated by media, advertisers, and investment professionals who want to sell products. The stock market, the media, and popular culture, by and large, encourage behavior consistent with the belief that the market is inefficient.

One of the expressed convictions stated in Matson Money’s mission statement is “Free Markets Work,” which is another way of saying that the market is efficient.

This means that:

Based on supply and demand the market is the best determinant of price.

All available information is factored into the current price, and therefore, only new and unknowable information and events change pricing.

It is not possible for any individual or entity consistently to predict market movements and capture additional returns unrelated to risk.

Based on this belief, Matson Money investment practices will:

Focus on capturing market returns

Utilize asset class or structured funds

Diversify prudently

Eliminate stock picking, track-record investing, and market timing