Perhaps the most influential theory of the stock market over the last 50 years is that of the efficient market hypothesis. This theory, developed by Eugene Fama, stipulates that markets are rational and that all the available information is appropriately reflected in stock prices. As such, it is impossible for an investor to consistently beat the market on a risk-adjusted basis. The efficient market hypothesis is often discussed as having three forms: a weak form, a semi-strong form, and a strong form:
- In the weak form, the market is efficient in the sense that you cannot use past information from prices to predict future prices. Information is reflected in stocks relatively quickly, and while technical analysis would be ineffective, in some scenarios, fundamental analysis could be effective.
- In the semi-strong form, prices...
