Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Market Efficiency?

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With the stock prices rising so dramatically for many companies on apparently so little news, we academics take a lot of kidding about the efficient market hypothesis which says that the market price of a stock fairly reflects fundamental information about the company.  Just what fundamental information is the market reflecting?  In our defense, it is important to draw a distinction between informational market efficiency and fundamental market efficiency. As described in our book, The Conceptual Foundations of Investing, a market is said to be informationally efficient if it responds quickly to new information.

Tesla is a poster child for informational efficiency. The stock responds almost instantaneously to slightest hint of news. A tweet by Elon Musk can set the stock moving the instant after he hits the return key. But fast response to information is not the same thing as a fundamentally correct response to information. A market is said to be fundamentally efficient if stock prices fairly reflect fundamental value. That means when the stock price moves in response to information, it moves the right amount.