Efficient Market Hypothesis (EMH) — what is it?

What is efficient market hypothesis?

Efficient Market Hypothesis (EMH) is a theory formulated by Eugene Fama in 1970. It states that asset prices in financial market at any moment reflect all available information. Consequence: it's impossible to systematically "beat the market" because every new information is immediately incorporated into price.

Three forms of EMH

Weak form

Prices reflect all historical price data. Technical analysis (charts, patterns) doesn't provide advantage. Past price movements don't allow predicting future ones.

Semi-strong form

Prices reflect all publicly available information — financial reports, news, analysts' forecasts. Fundamental analysis doesn't provide advantage because everything is already priced in.

Strong form

Prices reflect all information, including confidential (insider information). Even insiders can't systematically profit. This form is commonly considered too extreme.

Arguments for EMH

• Active funds underperform index — over 80% of actively managed funds don't beat benchmark over 15+ year horizon
• Professionals don't have advantage — even best managers have difficulty with repeatable results
• Information spreads instantly — in internet era arbitrage is increasingly difficult

Arguments against EMH

• Speculative bubbles — tulip mania, dotcom, real estate 2008 — prices deviated from fundamentals for years
• Market anomalies — January effect, small company effect, momentum
• Behavioural finance — people aren't rational, emotions affect decisions
• Warren Buffett — decades of above-average returns are hard to explain by luck alone

What EMH means for your investing

If EMH is even partially true (and data suggests it is), then:

1. Passive investing makes sense — index funds/ETFs are rational choice
2. Market timing doesn't work — don't try buying at bottom and selling at top
3. Low costs are crucial — since you can't beat market, minimize fees
4. Diversification is important — don't bet on "sure things"

How Freenance can help

Freenance supports EMH-aligned approach — instead of looking for "hot tips", you track diversified portfolio, monitor costs and stick to long-term strategy. Dashboard shows entire wealth, helping make rational decisions.

👉 Invest rationally with Freenance — freenance.io