Efficient Market Hypothesis (EMH)
The theory that asset prices fully reflect all available information, making consistent outperformance very difficult to achieve.
What is Efficient Market Hypothesis?
The Efficient Market Hypothesis (EMH), developed by economist Eugene Fama in the 1960s, holds that asset prices fully and instantly reflect all available information, making it impossible to consistently achieve above-market returns through stock selection or market timing. EMH comes in three forms: weak form (prices reflect all past trading data), semi-strong form (prices reflect all publicly available information), and strong form (prices reflect all information including insider knowledge). The hypothesis underpins the theoretical case for passive investing through index funds and is one of the most studied and debated concepts in modern finance.
Example
Eugene Fama, who was awarded the 2013 Nobel Prize in Economics partly for this work, showed in his landmark 1970 paper that consistently predicting short-term stock price movements using public information is extremely difficult, supporting the semi-strong form of EMH and laying the intellectual foundation for index fund investing.
Source: Journal of Finance — Fama (1970)