Is the “efficient markets” tale a myth? It can be pretty hard to feel comfortable that the markets are pricing stocks and exchange traded funds (ETFs) efficiently these days after witnessing wild price swings in either direction. How can you make sense of it?
As millions of smart buyers and sellers compete to maximize their wealth, they update stock prices with all the relevant information that’s available. That’s what it means to be an “efficient market,” explains Jason Zweig for The Wall Street Journal. Efficient markets mean that securities are the best estimate of “intrinsic value.”
Just because the market price is the best estimate on hand, however, doesn’t mean it’s right. Benjamin Graham, that great financial analyst, once said that the theory “could have great practical importance if it coincided with reality.”