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馃敶 Efficient Market Hypothesis in 2 Easy Steps: What is Efficient Market Hypothesis Lecture EMH - YouTube
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Efficient Market Hypothesis in 2 Easy Steps
- What is Efficient Market Hypothesis Lecture
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EMH
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Hello and welcome back again to MBABullshit.com.
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So the topic for this video is the Efficient
Markets Hypothesis also known as EMH.
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And this is the basic video before we move
on to a more advance video on the Efficient
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Markets Hypothesis.
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Remember you can always go back to MBAbullshit.com.
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Alright so let鈥檚 get down to it.
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Now before this video, it鈥檚 best if you
already know the meaning of Fundamental Analysis
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and Technical Analysis also known as Chart
Analysis as tools for predicting share and
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stock price movements.
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Share and stock is the same thing.
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Some people say share price, some people say
stock price.
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So make sure you know these 2 forms of stock
price analysis before watching this video.
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This basic video discusses the basics of Efficient
Markets Hypothesis as well as the basic differences
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between Strong Market Efficiency, Semi-strong
Market Efficiency and Weak Market Efficiency.
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I know these words sound pretty intimidating
right now but don鈥檛 worry you will see how
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easy and simple actually is what I show you
the examples.
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My next more advance video will still actually
be super easy and you can find it in MBABullshit.com.
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And it simply and easily explains how stock
and share prices move up and down in efficient
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markets depending on people鈥檚 expectations.
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Alright so now let鈥檚 get down to it to this
basic video.
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First of all, it鈥檚 best to recall basic
stock investing.
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Basic stock investing or basic stock playing,
or trading or whatever you want to call it
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or whatever type, they鈥檙e not exactly the
same.
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But anyway, in basic stock investing, it鈥檚
a game of Good News versus Bad News.
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Now what do I mean by that?
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Well, it depends on sales reports.
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For example, it could be sales reports, income
reports, any or profit reports you may want
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to call it.
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Anyway, what is this mean?
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It means that the Good News or Bad News regarding
sales reports or profit reports are directly
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related to stock price.
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Basically, if the sales reports are good or
the profit reports are good then the price
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of shares are supposed to in theory the price
of shares or stocks go up.
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But if the sales reports of a company are
bad then the share price or the stock price
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of that same company should go down.
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How might people earn money using the news?
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Well, let鈥檚 just look at this story about
greedy Bob and greedy Bill.
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Let鈥檚 say that Bob here is the CEO of a
company and he sees that latest company sales
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reports and he sees that the company is doing
great.
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And let us say that this company that Bob
works for is listed in the stock market.
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So Bob the CEO sees the latest company sales
reports and he sees that his company is doing
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great.
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What he might do he does not announce this
report to the public yet and instead he tells
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his buddy Bill about this great sales report
before telling the public.
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Now what does Bill do?
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Bill buys the stock or buys the share of stock
before the news announcement about this company鈥檚
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great sales report.
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And then what happens?
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Bob then decides to announce it to the public
and after the news announcement, the share
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price goes up.
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And what happens to Bill?
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Bill gets rich quick.
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Why?
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Because he bought the stock before the news
announcement and then there was news announcement
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and then Bill share price went up.
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So Bill gets rich quick.
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So that鈥檚 one way people can earn money
by trading the news.
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Basically this is the story about greedy Bob
and Bill.
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What actually happened here?
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(1) Number one is Bob the CEO learns about
the good news.
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(2) At first, he tells only his buddy Bill
about the good news.
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(3) Bill buys the stock in advance.
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(4) And then Bob announces the good news to
the public to people like your grandma, or
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very often we have this grandma investors
who don鈥檛 know much about the inside information
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of the company about the secret information
of the company.
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And then it鈥檚 only after people like grandma
hear about the news that the stock price goes
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up.
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And then people like Bill over here get rich
quick.
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And grandma here did not get rich quick because
she heard about this good news already after
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Bill made money on it.
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So in other words, people like grandma hear
about the news too late together with everyone
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else.
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So she鈥檚 not so happy over there.
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And you might say why she doesn鈥檛 earn money
the stock price still went up.
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Well, in theory, remember that in stock trading
for you to win someone else has to lose because
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you buy the stock cheap or Bill here buy the
stock cheap and then he sells it expensive.
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Who does he sell expensive too?
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Well, he sells it expensive to people like
grandma after the price has already gone up.
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So in theory anyway, stock trading for you
to win someone else must lose.
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And in this case, Bill won against grandma.
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So in theory, Bill bought the stock when it
was still low priced before the announcement
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and then sold it to grandma at a high price
after the announcement.
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However this is actually what happens.
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This does not happen in what we called an
efficient market.
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Another way of saying it is; we saw this bad
situation over here but actually in a perfectly
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Efficient Market that would not happen, this
bad thing that happened over here, this bad
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situation between Bill, Bob and grandma.
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This would not happen in a perfectly Efficient
Market.
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Why?
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Because in a perfectly Efficient Market; (1)
there鈥檚 number one example there鈥檚 good
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news.
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(2) Number 2 even if Bob is the CEO, Bob,
Bill and grandma all learn about the good
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news at the same time even if Bob is CEO in
a perfectly Efficient Market.
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Why is that?
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Because in a perfectly Efficient Market, the
keyword here is perfectly efficient, all relevant
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information about the company such as the
sales report flows or moves or travels instantly
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or super quickly between Bob, Bill and grandma.
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So Bill does not have an advantage even if
he鈥檚 the buddy of Bob which is the CEO.
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Now, in MBAbullshit language, in business
school bullshit language, instead of saying
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perfectly Efficient Market, we usually say
Strong Market Efficiency.
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So if you鈥檙e in business school, you鈥檙e
wondering what does Strong Market Efficiency
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is that the textbook or your professor teach
and talking about, they鈥檙e talking about
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a perfectly or almost perfectly Efficient
Market like this situation over here where
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they all learn about the information at same
time or almost the same time.
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What does this mean for investors?
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It means that in a perfectly Efficient Market
with strong market efficiency at any one time,
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anyone and everyone already knows all relevant
information about a share or stock.
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So nobody can earn money by using any information
such as this sales report over here.
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Nobody can earn money using this information
to analyse and predict the future share or
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stock price movements either up or down.
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So people like Bill cannot use the information
to beat grandma.
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Why?
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Because grandma already knows the same information
too at the same time that Bill knows it.
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So it鈥檚 useless to use inside information.
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What is inside information?
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What鈥檚 the difference between information
and inside information?
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Inside information just means the secret information
that only Bill and Bob know.
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Grandma doesn鈥檛 know it yet.
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It鈥檚 secret, inside means like secret information
or advance information that Bob knows.
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But in a perfectly Efficient Market with strong
market efficiency, it is useless to use inside
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information, fundamental analysis or even
technical analysis to give you or to give
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Bill an advantage in stock investing.
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Why?
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Because fundamental and technical analysis
are based on information and since these two
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are based on information, how can these two
give you an advantage if the information you鈥檙e
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using is already known by everyone.
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Remember in stock market investing, you have
an advantage if you know about this information
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before other people know it.
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Therefore, Bill also does not have an advantage
when he uses fundamental analysis which uses
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that information and he also does not have
an advantage when he uses technical analysis
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which also uses information or which is also
based on information.
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