An old news story provides further evidence that the Efficient Market Hypothesis is valid. The Efficient Market theory states that all public information is reflected in the price of security. Put another way, news effects the prices of stocks almost as soon as it is known.
Recently an old news story from the Sun Sentinel provided more evidence in support of efficient market pricing. Google News picked up an old news story about United Airlines filing for bankruptcy. As the story was picked up by Bloomberg (the financial news system) it caused the price of a stock to plummet almost instantly when the information was flashed on Bloomberg terminals nationwide the following Monday morning.
The interesting part is that automated trading systems picked up on the news after it was published on Bloomberg. You can read the full story of how automation caused the price of United Airlines to plummet.
Many people are concerned about automatic trading. However, automatic trading systems are the reality of today's markets. PhD's in several fields have built such systems. The computers react within milliseconds to make trading decisions.
Based on the existance of these trading systems and the fact that we now have proof of how they work, we can say that the market is more efficient than ever.
Keep in mind that efficient doesn't mean correct. Even people who know better are confused by this distinction. All the efficient market theory says is that all information about a company is reflected in it's stock price. It does not say that the information itself is necessarily correct.
Everyone knew that tech stocks were overvalued in the late 90's/early 00's. However, the holders of these stocks were hoping that there was a greater fool that could be convinced to buy the stock. So this is not a case where information is not known, in fact the information was known. Stocks were overpriced based on fundamentals, but based on the greater fool theory, people's greed and speculation was efficiently reflected in the price of stocks at the time.
As Benjamin Graham said, in the short run the stock market is a voting machine but in the long wrong it is a weighing machine. Meaning true value will prevail in the long run.
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Nice Article!