The efficient market hypothesis (EMH) was developed by Eugene Fama in the 1960s.

He put forward the idea that in an open and efficient market, security prices fully reflect all available information and prices rapidly adjust to any new information. For this reason, market prices are always the correct price for any given security and reflect the best estimate of their true intrinsic value. Therefore there is no opportunity to pick undervalued stocks and you will only be able to achieve a return equal to the market.

The 3 forms of EMH

Weak Form:

• Prices fully reflect all past information and trading volume information.
• You cannot predict future prices by using this type of data, therefore technical analysis will not work to produce market beating returns.

Semi Strong:

• All historical and publically available information is reflected in the current price of an asset. It implies that technical and fundamental analysis will not produce superior returns

Strong Form:

• All information is reflected in the price, including information that isn’t publically available.
• It implies that even insider trading will not work

In reality markets have varying degrees of efficiency, with some markets being more efficient than others. In markets that are less efficient, more knowledgeable investors can outperform less knowledgeable ones:

• Government bond markets are considered extremely efficient.
• Large capitalised stocks are considered to be very efficiently priced
• Smaller capitalised stocks or ones which are not widely followed by analysts are considered to be less efficient.
• Venture capital is considered less efficient because different participants may have varying amounts and quality of information.