At business schools around the world, finance professors are teaching their students that financial markets are efficient.
At the same time, you can see very high price fluctuation in a short period of time, which might suggest otherwise.
So, are markets really efficient? The professors do have a strong case in theory.
If there were any difference between the price for a share and the value of a share, then people would start trading that share until it was priced fairly, and make a profit doing it.
However, there are two things the professors don't take into account in the equation.
The first thing they don't really take into consideration is how difficult it can be to price a stock.
This is because the biggest part of the value of a share is normally in the future and the future is very hard to predict.
Try to pick any large company and collect the company analyzes from different analysts.
You will discover that most often there is great variation between the valuations each analyst has figured for the company - and these are the experts, who are paid enormous amounts of money to do it for a living! Professors will claim that the market as a whole gets it right.
I think it is a matter of what you believe.
The second thing is that almost all financial and economic theory is built on the assumption that people act rationally when they make financial decisions.
This is not a hard assumption to dismiss.
Just think about the last time you went shopping for groceries.
Did you only buy what you planned to, or did you do some impulse buying, too? Very few people act rationally in the supermarket.
Every supermarket manager knows we use feelings when we shop.
Why should we be more rational in other financial decisions? So, the evidence indicates that markets are not completely effective.
We should all rush out and take advantage of that, right? Hold on, not so fast.
As I stated earlier, it is very difficult to predict the future and therefore also to assess the value of a stock.
At the same time, everybody thinks they can beat the market, but very few actually do it.
If you take mutual funds as an example, they employ very talented people.
On an average basis, however, they do not beat the market, but get a return slightly lower than the market.
These are professional people and they can't perform better than the market.
So, if you think you can, you should be able to come up with a very good reason to back it up.
On the other hand you have investors such as Warren Buffett, who have gotten a return above 20% for a number of years.
So it is possible, with the right approach.
Over the years, there have been a number of studies to try to figure out if any investment approach will beat other approaches.
For example, it has been shown pretty clearly that day trading doesn't pay any extra return, although it is also implied that a fraction of day traders can earn a living.
I haven't seen any studies that conclude that technical trading works.
The one approach I have seen studies suggest will be superior is value investing.
It is not completely conclusive, as there are counterpoints, but if you look at many of the successful investors, they do have a long-term view and a value approach to some extent.
That is a very strong argument for me.
My conclusion is that markets are not completely effective.
However it is also difficult to take advantage of their ineffectiveness.
You have to put in a lot of time and effort if you want to be able to expect to perform better than the market on average.