So let me just talk about what, I mean, I gave you history of thought, sort of about market efficiency. And and what people have thought over the time. Starting in the 19th century, information technology began to develop. There was a man named Reuter, who in just before the invention of the telegraph, decided that stock markets need up-to-date information. And so, he thought, how "How can I get information fair or of sell information?" So what he does is, these pigeons fly faster than any human transport, carrier pigeons. So what he did is he set up offices in major European cities and bought pigeons. And pigeons, and as soon as some market event happened in London, he would tie a piece of paper to the leg of the pigeon in London and send the news to Paris. And how long will it take a pigeon to fly from London to Paris? I don't know. It takes 4-6 hours for a pigeon to fly from London to Paris. So it gave a trading advantage to people. So he was a big success with his pigeon service, and later, when they invented the telegraph. That that was here in New Haven, By the way way, Samuel F. B. Morse invented the telegraph. What year was that? Wasn't it around 1840? I don't remember exactly. The writers went to the telegraph to speed it up even more. By the late 19th century, everyone was getting information with the speed of electricity. And they got beepers in the 20th century installed that would beep them when there were some important news. They would carry that around. Even before you had a cell phone, you could get a beeper. So the idea is that the information, there's so many smart people trying to get information. It must be hard to beat the market and that means that you really can't predict it. So the random work became plausible because people thought, "Yeah, all these people are trying so hard to get the information as quickly as they can and they trade on it as soon as they get it." So doesn't that mean that if anyone has some idea, so if the market goes down in London, it will probably go down in Paris too. So if the London market falls, you would like to sell in Paris. The problem is you can't get the information in Paris fast enough. But now that they get it really fast. the market must adapt, adjust almost immediately. So this is what it came to. The reason efficient market sounds plausible is you have to educate people out of naive ideas that they can predict the market. So some people will go to their broker and say, "You know, the other day I read in the Wall Street Journal that this company has a new drug that's about to come out, so is that a reason for me to buy?" Then, the broker will tell you, "You read it when, last week?". Your broker might say, "When that news came out, I remember my beeper went off immediately and I rushed to my colleagues and said, what's this news mean?" And someone said, "Sell, sell right now." So I placed an order in 15 seconds. He had it and said, "You got to beat the others." And then I said, "I just saw but I hadn't even had 15 seconds to talk about it." They talked more about it and they think, "Well, maybe I shouldn't have sold." So 30 seconds later, you buy. And then within two minutes, they've got got an expert advice on what it means and the market has gone wild, and now it sells down at the new optimal level. So, maybe the market wasn't perfectly efficient for 15 seconds. But you had better be educated that if you read something in the newspaper last week week, it's already incorporated into in the market prices. Even in 1889, it oh, I didn't have beepers then. Here's a 1904 article, it's a really nice article by Charles Conant. In in a magazine, and it's about the beauty of markets, and he was referring to the public. He referred to a ignorant public view that markets are a sort of gambling casino. But he said, a "A moment's reflection should convince that person that a function which occupies so important a place in the mechanism of modern business must be a useful and necessary part of the economy." Yeah, what he's getting at is that those prices in markets are the result of people trying to figure out values, and if we didn't have the markets, we wouldn't know what anything was worth. Any business plan involves prices. As a business, you're going to have to buy commodities or you're going to have to borrow at interest rate. All these prices are relevant to an intelligent decision. So not only are markets efficient in the current economy, they're better knowledge than any individual because it involves so many people of all putting their money on the line and trading them. And then it produces values which he implicitly assumes in 1904, are the best estimate of fundamental value, and then it drives businesses and make decisions, whether to build a new factory or to hire new people based on these prices. So it's a beautiful system that he talks about. Until the financial crisis. Textbooks were glowing in defense of the financial market. Even your textbook Fabozzi those in an earlier edition in 2002 said, "Publicly available, relevant information will lead to correct pricing of freely traded securities in properly functioning markets." Here's another textbook of finance by Richard Brealey and Stewart Myers in an earlier edition. Efficient markets really took hold the theory in people's thinking, starting after [inaudible] book. It really was intellectual revolution. But according to Brealey, Myers and Allen. "Security prices accurately reflect the available information, and respond rapidly to new information as soon as it becomes available." That's a pretty strong statement, and then they did qualify it. "Don't misunderstand the efficient markets idea. It doesn't say that there are no taxes or costs. It doesn't say that there aren't some clever people and some stupid ones. It merely implies that competition in capital markets is very tough. There are no money machine, and security prices reflect the true underlying value of assets." So he's not really qualified. They're not really qualifying it very much. They're telling you to believe prices you see in the markets as if they were truth. They have subsequently however, in their 2000 a day eighth edition edition, this is after the beginning of the financial crisis. They have qualified it. I don't mean to laugh. They're great people. They're reflecting, when you read a textbook, the ideas of the time. But I'm just using this as a sign of how much. Thinking has changed. They now say say, "Much more research is needed before we have a full understanding of why asset prices sometimes get so out of line with what appears to be their discounted future payoffs." So the efficient markets hypothesis has taken a hit after the financial crisis, and you can see it in the textbooks. So, I think efficient markets is like that it was a scientific revolution that came out really in the '60s, and then the '70s, and it led to the extreme bull market that we had around the world in the 1990's. People then finally decided that whatever the stock market does is right. Whatever the housing market does is right because its markets are efficient, and that unfortunately wasn't quite right. Harry Roberts is the coiner of the term efficient markets. Although I've traced the history back almost 100 years before him they didn't call it the efficient markets hypothesis. He said there are three forms for market efficiency. Weak form is that information in past prices can't help you to forecast, the semi-strong form of efficient markets is that all publicly information is already incorporated in the market prices, and the strong form is that all information including inside information held by the companies is already incorporated in the stock prices, prices because it leaks out. Companies can't keep secrets. Actually, I think this semi-strong form is the one that we focus on. I don't think that companies can't keep secrets. They sometimes leak out but they don't always leak out. So my first question is, so the efficient market hypothesis was stated 50 years ago, but why is it still a hypothesis? Shouldn't there be enough research and data to whether either accept or reject it? And even more puzzling, how was the Nobel Prize awarded to someone who clearly advocates this theory, Eugene Fama, and someone who's saying, this theory, and you at the same time? There's a lot of things I have to say about this topic. One of them is even more than 50 years old. They didn't call it the efficient markets hypothesis, but going back centuries, there were people who thought markets are wonderful and perfect. They may not have articulated it well. The term efficient markets was popularized by Eugene Fama, who won the Nobel Prize with me. I actually am a big admirer of Eugene Fama, and his papers, honest, were very interesting. I would say that the efficient markets hypothesis is a half truth. It's sort of true. It's good. I try to teach it to you. I hope I taught it. Maybe I didn't go far enough in extolling it, but it's useful for you to think of that if you want to go into investing because you probably have exaggerated expectations of for what you can do. So, I said that Eugene Fama would be pleased to hear this. But then then, I have also a sense that it's not that efficient, it's not that perfect and that we shouldn't trust it. So someone listening to efficient markets theory might say that the head of a Central Bank should never comment on the stock market because the stock market itself is smarter than any individual. And now now, I think maybe they shouldn't usually comment on it, but there are times when the market looks crazy. And I'm sorry, I think that the Fed or the Central Bank head is smarter than the market, often at least, not always, and I ought to come out to make an opinion on that. And also, that certain anomalies have appeared. For example, buying stocks with low price earnings ratios has paid off historically for a long time. I think that that's probably best explained by psychological theories theories, that some stocks become ignored and they get underpriced because nobody remembers them. Others get overpriced because they're hot. hot. Isn't it something to keep in mind to understand the market fluctuation? So it is a hypothesis. I would say maybe it's wrong to call it a hypothesis. The better name for it would be the efficient markets half truth.
