EMH Mark 1*

I’m back in the thick of the Business Press, this time at the end of the 1970s. And I found this gem, in an article about investment opportunities and the stock market:

Some investors, however, are questioning the very concept of “undervaluation,” which has allowed Wall Street to sell equities even as share prices plummeted. Says one: “If the market is efficient — and it is — it sets the correct value on all investments, including stocks. If some are high, and some are low, that’s what they’re worth. It’s impossible for stocks — or anything else — to be undervalued.” (Business Week 12/31/1979, “New Investments for the New Decade”)

On one hand, let’s hope John Quiggin is right and the economic doctrine of Efficient Markets underlying this statement is refuted. It certainly seems a bit silly right now, in the light of the last two years of turmoil and crash.

On the other hand, on some basic level, I think the statement is tautological. Something is worth what you have to pay for it. If you can buy or sell it on the market, then the market price is what it’s worth. Value == market price. I know that’s not quite what folks mean when they say the market sets the correct value on a financial asset – it has to do with the expected value of future returns and all that. But on some basic level, I think we think value in terms of the market, which gives a statement like the one quoted a lot of credibility and validity.

* And yes, this is a semi-obscure Voyager reference. Welcome to my world.

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