Lead-Lag Report: The Myth of Market Efficiency with Cullen Roche

One of the key investment theories underlying investment ideas is known as the efficient market theory. The EMT states that any new information about a company or the economy is instantly digested.

Under this theory, investors are best to simply buy a market index. Beating the market is theoretically unlikely over long periods. Or such success can simply be attributed to luck rather than investment skill. The problem with this theory? It’s simply a myth.

 That’s because prices are always adjusting to new information, not because they’re right. Rather, it’s because they’re wrong.

Markets were wrong in 2020 about the impact of the pandemic, then sold off heavily. Then they soared following a flood of stimulus money. Only to slide again as that stimulus led to inflation.

Financial markets, no matter how sophisticated or computerized, remain subject to human whims. Emotional responses can cause the irrational to feel rational.

Today, with market uncertainty rising, investors who have blindly bought the dip are down and out for now. Over time, it’s likely that the market will recover. But how long that takes and the shape it takes can matter for returns.

Even great investors can get caught up in emotional traps, and with it, see poor returns.

To see the full impact of how markets aren’t as efficient as they seem, click here.