Efficient Markets

In an efficient stock market, the price of a company's stock provides a good estimate of its intrinsic value based on all publicly-available information. The stock price may fluctuate wildly going forward, but only in response to new information that was not previously known to the public. Capital markets are considered to be efficient if current prices fully reflect all available data.

Market efficiency is not a new concept. Adam Smith described an efficient consumer goods market in The Wealth of Nations, published in 1776. The idea of market efficiency can be applied in a similar manner to today's capital markets. Financial economists have theorized that the efficiency of capital markets arises from competition among numerous self-interested investors each trying to predict the future market value of individual securities. As a result, each security is appropriately valued given all available information.

Our belief in market efficiency is not based on dogma or ideology. Rather, it stems from the results of over 30 years of empirical research. While this scientific evidence is important, the bottom line is that investors are interested in growing their investment portfolios the best way possible. The real question is what can you do to maximize your expected returns from investing? The answer is passive investing.

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