Market efficiency

What is market efficiency? We can measure market efficiency in a few ways… Market efficiency can be measured by how well the market react to news and information as well as ‘fairness’ between buyers and sellers. Hmm… what does this mean?

For example, when a positive news about a company is announced, the price will go up immediately. How fast the price responds to the news will tell you how efficient the market is… Take note: not only the response time is measured, the price should also move in proper direction. That means, when a positive news is out, price should go up, not down..

In an efficient market, ‘fairness’ is also an important measurement… What do I mean? First of all, all companies have their very own intrinsic value… Or how much the company is worth… And this price will be reflected in their market price… That means there is a balance between the supply and demand (how does this affect the price? You can refer to my previous post), there will be no overbought or oversold situations… Which means the companies are selling at their fair value…

Does this sound good to you? Hmm… If you ask me, this might not be such a good news to me…. Why? Let us analyze this: First, which method do you use when buying stocks? Do you use fundamental analysis or technical analysis? An efficient market is a very bad news for those that uses technical analysis (TA)… Because like it or not, TA earns from overbought or oversold conditions… From other’s panic selling or ignorance… So, in an efficient or fair market, how are they gonna earn?

How about those that uses fundamental analysis (FA)? This may sound like good news because an efficient market also puts price of stocks according to their intrinsic value… Which means, those that are masters of analyzing fundamental values of a company will pick up great stocks to invest in… They will be able to earn when the company expands fundamentally which will bring up the price or from their dividends… Sounds like a good news? Maybe not.. In most investments, the earnings can be divided into realized and unrealized gains… Realized gains is the money you get from dividends, unrealized gains is from the price increase which is enhanced many folds from overbought or oversold conditions… However, majority of the earning is from the unrealized gains component, and this can be seriously hampered in an efficient market…

So, the question now is, do you think Malaysia is having an efficient market? It’s a definite no for me… The next question is, do you want an efficient market? That is a definite NO from me too… But how do we survive this inefficient market? The answer is SKILLS… Be it fundamental or technical analysis… Skills is the thing that will decide whether you can make it or not in this inefficient market… So, let us enjoy this inefficient market to the most by improving our SKILLS!!!