Efficient Market Theory Vs Mr. Market
In this article, I explore to you the concept of Efficient Market Theory and what is Mr. Market as per Benjamin Graham the "father of value investor".
The efficient market theory (EMT) is a financial theory developed by Eugene Fama in 1960. In EMT it is said
that :
“It is impossible to beat the market because the price already
incorporates and reflects all relevant information as soon as it becomes freely
available.”
This means when information about a stock is available to one
investor it will become freely available to all investors at the same time.
Therefore the price of a stock will immediately reflect the knowledge and
expectations of all investors. As a result, there is no way for investors to
beat the market since there is no way for them to know something about the
stock that is not already reflected in the stock price, except for insider
information and insider trading which is illegal.
In other
words, this theory told them they should not try to pick winners because stock
values are always traded at their fair value and it is impossible to buy stocks
at a bargain price i.e undervalued. As such investors are engaging in a game of
chance, not skill.
What is wrong with this theory?
In reality, this theory is flawed because all investors access information at different
times and from different sources. Moreover, buyers often overreact when the news
is good and sell shares desperately when the news is bad to avoid further
losses.
Mr. Market
The word used by the most popular Bejamin Graham who is the father of value investing, to explain his concept of the market in simpler terms. He says Mr. Market offers you daily without fail to either buy a company share or sell the company share at a specific price.
The interesting thing you understand here is that if you ignore Mr. Market's offers, he will not take any offense, Instead, he will provide another offer the next day.
In my opinion, if you are in an investor mindset, not a speculator mindset, or investing from a business perspective (fundamental analysis) and buying shares, you will wait for the bargain price and sell your shares at a higher price. That's why Graham said, " Mr. Market is to serve you not guide you". You always remember that you can take advantage of Mr. Market's irrational behavior only if you have done your homework (Value).
