Debunking Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis, or EMH, is an investment theory whereby publicly trade share prices reflect all information and consistent alpha generation is impossible. Theoretically, neither technical nor fundamental analysis can produce risk-adjusted excess returns, or alpha, consistently and only inside information can result in outsized risk-adjusted returns.

According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. If this is true it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

I guess Mr. Warren Buffett might disagree, and EMH is highly controversial and often disputed. Believers argue it is pointless to search for undervalued stocks or to try to predict trends in the market through either fundamental or technical analysis.

Data compiled by Morningstar Inc., in its famed Active/Passive Barometer study, supports the EMH. Morningstar compared active managers’ returns in all categories against a composite made of related index funds and exchange-traded funds (ETFs). The study found that year-over-year, only two groups of active managers successfully outperformed passive funds more than 50 percent of the time—U.S. small growth funds and diversified emerging markets funds. In all of the other categories, including U.S. large blend, U.S. large value and U.S. large growth, among others, investors would have fared better by investing in low-cost index funds or ETFs.

Amazingly, we believe Tri-Party Venture Funds may have the potential, over a longer period of time, to finally “Debunk EMH”, as a non-diversified pooled investment fund with pre-qualified Private and Public Venture Partners, who have demonstrated historical, replicable, and consistent returns over years of investment performance. Making for a new Investment theory, which is near synonymous, encompassing a novel body of knowledge that we use to support the decision-making process of CAPQ Funds, in our qualifying Venture Partners, and not trying to chase individual investments. We pre-set asset pricing models, which are then applied in determining the asset-specific required rate of return for our Venture Partner and hence our funds’ investments, and in pricing derivatives and exit timing on the investments, for trading or hedging.

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