On “Market meltdown refutes ‘efficient markets’ theory,” Kate Gibson of MarketWatch interviews market strategist, Nicolas Colas, who questions the validity of efficient markets and other common notions upon which our modern financial theory is based.
An “efficient market,” according to the traditional financial and academic community is supposed to “efficiently” factor in all available information in its price. This obviously wasn’t the case with the recent market meltdown, as investors and financial experts had all the information (in company filings and reports/news about the housing and mortgage markets) right under their noses, yet ignored the news until companies started failing.
The recent debacle also throws out the window the notion that holding stocks for 5 to 10 years will produce almost sure returns.
Colas wraps up with an important comment: “What I’ve tried to say is don’t baseline your expectations on the notion that markets are as efficient as the academic world wants to believe, think for yourself.”
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