[Summary]
The efficient market hypothesis is the idea that information is factored into market prices.
Merely remembering the meaning of the efficient market hypothesis is not enough to make actual buying and selling decisions. You need to look at the context in which the words are used.
In actual investing, we first start by understanding the basis of index investing. However, we cannot overlook the fact that we accept that the market is always right.
In this article, we will organize the efficient market hypothesis not as "knowledge" but as a procedure to confirm before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, we need to differentiate based on the efficient market hypothesis.
When looking at the efficient market hypothesis, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. The efficient market hypothesis alone is not sufficient for making decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Translating the meaning of the efficient market hypothesis into practice
If we look at the efficient market hypothesis in terms of its meaning, we must first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What we see from the efficient market hypothesis |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
The efficient market hypothesis stumbles not only when there is a lack of knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Do not use the definition of the efficient market hypothesis as a buy/sell signal
- Separate the meaning, situations in which it is used, and situations in which it is not used.
- Check only one difference between similar words
- If you cannot explain it, reduce your position.
The important thing here is not to rely solely on the efficient market hypothesis as the correct answer. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using the efficient market hypothesis as a basis for making an actual decision, please check at least these five points.
- Can you explain in one sentence the purpose of looking at the efficient market hypothesis?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of confirming the efficient market hypothesis is not to act faster, but to reduce unnecessary errors in judgment.
Summary
The efficient market hypothesis is a material for organizing investment decisions. Even if you read it as a meaning, your judgment will be inaccurate if you treat it as a standalone buy/sell signal.
The points to keep in mind are as follows.
- Decide first the purpose of looking at the efficient market hypothesis
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat the efficient market hypothesis as a tool to pause before buying or selling, rather than as a word that forces you to make a hasty decision.