The Efficient Market Hypothesis (EMH) is an investment theory whereby share prices reflect all information and consistent alpha generation is impossible. Theoretically, neither technical nor fundamental analysis can produce risk-adjusted excess returns, or alpha, consistently and only inside information can result in outsized risk-adjusted returns. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
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While there are three forms of the Efficient Market Hypothesis, namely the weak, semi-strong and the strong form, all of them seem to be far from the truth. Proponents of the theory claim that the market will immediately and effectively reflect all available information in a stock's price. This essentially means that it is virtually impossible to outperform the market. Whether technical or fundamental, any analysis will be futile and there will be no discrepancy in the prices of a stock and the underlying value of a security. A corollary of this theory is that since all information is already discounted in a stock's price, there are no other factors that can affect market prices of stocks. Here are six facts that contradict this theory and lays the foundation of a large opportunity, which we will discuss shortly. 1. Security prices, in the short term, are governed by supply and demand and may have no relation to the intrinsic value of a company. There is a multitude of investors participating in the market at any given moment. And often there are imbalances in supply and demand of a given security, which drives price. heavy buying or selling both can drive prices to a large extent. In fact, this is the very reason why circuit filters are in place in any regulated market.

2. Motivations for buying or selling shares, for a large pool of investors is not the underlying value of the stock. Investors transact in shares for a wide variety of reasons. The expectation of dividends, capital appreciation, speculation and arbitrage are few of these. Since the underlying value of a company is not the only reason why investors participate in the markets, it is obvious that information is not the only reason behind a price change.
3. A stock that is a part of some index will be bought by an index fund irrespective of its underlying value. Here is a list of Nifty 50 funds
If any of these funds decide to pump in money, each of the Nifty 50 stocks will be faced with buying pressure which will drive prices up. The converse also holds true in case the fund wishes to divest. This again, is an instance where prices are not driven by the intrinsic value of a company, thus creating a divergence between price and value.
4. Funds often are bound by several restrictions in their operations. For instance, at a given point, if the investment criteria of the fund are not met by a particular stock, the fund will liquidate its positions in the company irrespective of the prospects of growth. This has no relation to the value of the company whose shares are being traded. 5. Retail investors are governed by margin requirements by their brokers. For a given investment size, they are required to fund their account with only a portion of the investment size. However, if the value of the investment reduces over time, then the investor is required to fund his account further and mitigate his risk. There are times when an investor is unable to meet a margin call. In such cases, he is left with no choice but to liquidate his position. 6. A pool of investors buy shares solely by focusing on the earnings of the company. Such investors may liquidate their positions if the earnings for a quarter are disappointing. There is a popular article written by Warren Buffet titled "The Superinvestors of Graham-and-Doddsville". Here is a link to the article. In this article, Buffet talks about a group of investors who have repeatedly demonstrated how differences in price and value have led them to churning huge returns on their investments. Given these facts, it is reasonably safe to admit that the markets are far from efficient and presents several discrepancies between price and value. How can you benefit from this? By realizing that stock prices do react to information and that there are deviations in their prices from underlying value, we learn something. That the market often presents opportunities to buy stocks at a discount, which essentially is the objective of value investing. It is important to understand the factors that cause prices to diverge from or converge towards the underlying value and it is in the identification of these factors that the potential investor will find opportunities for profit. The prudent investor will certainly try and find such opportunities not only for the potential profits. There is another huge advantage of this method over other techniques of investing. Value investing is the art of identifying undervalued stocks which have certain characteristics. In fact, in any investment, the first objective should ideally be the minimization of risk, followed by an examination of the profit potential. Value investing achieves exactly this. For stocks that are undervalued, the potential downside is virtually the lowest possible. Hence, the risk of capital erosion is at its lowest. Once we understand the fallacy of the Efficient Market Hypothesis, aptly demonstrated by the facts mentioned here, it is easy to believe that prices do not always reflect all possible information about a company. As a consequence, investors are presented with a big opportunity, that of mitigating risk and finding worthwhile securities to invest in.