I am not such a fan of the efficient market hypothesis, even though I think in its weakest form it is correct. Here is how THE ORACLE defines its weakest version:

The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information.

The devil here is sitting around in the word “reflect.” What does it mean for a price to reflect information?

I would prefer to phrase it like this:

In an efficient market, prices are equivalent to the mean average of the opinions of everybody’s money.

Note a few key things here:

The average is mean, not median or mode – a single investor with a lot of dollars can weigh equally against many investors with relatively few dollars. Markets are not a democracy.

This measures only the opinions of people’s money, not of people. I know a lot of people who don’t think highly of Apple. I know many fewer people who are shorting Apple stock. Nassim Taleb claims only to opine publically when he has a corresponding position in the market. Most people follow no such rule.

There’s no reflecting here. This is an identity. Prices are the average opinion of all the positioned dollars, even when the price is incoherent.

This is the key, and it’s why Cornwall Capital made a lot of money, and it’s why Warren Buffet made a lot of money. There is no magic corrective in the market. If Apple’s stock today was worth a dollar a share, even though they are selling a poop-ton of iPads, that is because for whatever reason the average opinion of all the positioned dollars is that Apple is somehow worth far less than it obviously seems to be. If you disagree and think that Apple is a very profitable company and will continue to be one, then $1 or even $100 for a share of Apple is a steal. However, if you think Apple is toast and will be out of business in five years, you should probably be shorting them.

There’s no magic to this. Instead, it’s just really really hard. It’s not that there aren’t a surfeit of places where some hard notion of the intrinsic worth of a company is somehow different from what its stock price would suggest; in fact, that’s probably the rule, not the exception. But you have to do a ton of work to find them, then invest with confidence, and then you still have to be right a whole heck of a lot because the downside of this kind of trading swamps the upside. You can make very nice returns just sticking your dollars into index funds that track the S&P 500, and maybe hedge yourself with super-safe bonds; if you are chasing a return higher than that, you should ask yourself, why? And is it worth the time and effort minus the risk?

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