Welcome back. Thank you for joining me again. So in the previous two lectures, we looked at the main premise of the efficient market hypothesis. As well as some examples that illustrate how prices quickly react to reflect new information. In this lecture, we're going to go a little deeper and discuss the different forms of the efficient market hypothesis and what implications they have. Now typically, it is common to distinguish between three different forms of the efficient market hypothesis. And really, what it all sort of comes down to is what you mean by available information, right? And of course, the different forms will have different implications for what we can expect to see in the markets. Okay, so let me start with the weak form. Well, the weak form of the efficient market hypothesis states that prices reflect all marketing data. Now what is marketing data? Well, it's things like past prices, trading volume, or short interests, right? So basically, this version of the hypothesis implies that you can't predict future prices by looking at past prices or past volume, right? So what does this mean? Well, this means for example, that trend analysis is completely useless, right? If markets are weak form efficient, you can't use any past trading data, price or volume data, that is publicly available and virtually costless to obtain to predict future stock prices or future performance, right? And if such data were able to predict future prices, then all investors would have already exploited those signals, and therefore that information would already be reflected in the prices, okay? So that's the weak form of the efficient market hypothesis, where the available information just is the market information price data, right? Now, what about the second form? Well, the second form, the semi-strong form of the efficient market hypothesis states that all publicly available information should already be reflected in prices. Now, what do we mean by publicly available information? Well now, in addition to the past market trading data that I mentioned, think of all the information that is available about a company that is public, right? Its accounting data, its financial data, fundamental data, its patents, product line, earnings forecast. Anything you can find out about a company in the public domain. So if markets are semi-strong efficient, one should not be able to predict prices based on any such public data because that would already be reflect in prices, okay? All right, so finally, the strong-form of the efficient marketing hypothesis. All right, that one states that prices reflect all information that is relevant. Public and including all information that is available only to company insiders. Now clearly, right? You can see that this is a very tall order, right? And this version of the hypothesis is very extreme. Now, undoubtedly, company insiders are likely to have valuable information that is not public and that will allow them to profit from their information, right? And in fact, the ACC in the US tries to prevent exactly this kind of situation where insiders can exploit their private information to profit, right? The ACC regulates the trading activity of company insiders by requiring them to report their trades to the ACC. All right, so what does this all mean for investors and for how to pick investment opportunities, right? Well, let's start with technical analysis, right? So what is technical analysis? Or you may have heard of it, it is basically the search of, the search for predictable patterns in stock prices, right? So technical analyst study charts of past stock prices, hoping to find patterns to find profitable opportunities. Well, if markets are efficient even its weakest form, then this implies that technical analysis is completely useless. Right, because you can't predict future prices based on past prices. Suppose an analyst does spot a profitable trading rule. Would it continue to work in the future once it becomes widely recognized, right? So of course, if the market is efficient once a useful technical rule is discovered, it should disappear as investors rush to exploit it. What about fundamental analysis? Well, fundamental analysis, of course, relies on careful study of the firm's financials past earnings, its economic environment, its competition with the industry in the hope of coming up with some future forecasts of the firm's future performance, right? And the analysis is, if the discounted value of all the cash flows that a stockholder is expected to receive is higher than the current market price, then the fundamental analyst would recommend a buy. Okay, so what does the efficient market hypothesis say about that? Well, the efficient market hypothesis in its semi-strong form would imply that most fundamental analysis is also pretty useless, right? Because if your fundamental analysis relies on publicly available data on the firm and on the industry, then your evaluation is likely to be not very different than any other investor or competitor, right? And if that knowledge is already public, it should already be reflected in the prices. The only way you can reap benefits with fundamental analysis is if your analysis is better than your competitor. And why would it be better? How could it be better? Is it better understanding of the fundamentals, or is it private information? Well then, that is not public information, right? Because otherwise, the market price would already reflect all commonly known public information. Okay, well, so far it appears that efforts to pick stocks by predicting future prices is not very useful as competition among investors is likely to ensure that any useful information will already be reflected in market prices, right? So then what should you and I, individual investors with limited resources do, right? Well, you're probably thinking, well, how about investing in actively managed mutual fund portfolios, right? Surely the manager of these large mutual funds have the resources and the ability to uncover mispriced stocks, right? But then the question becomes, will this pricing be sufficient to cover the fees for their services? And in fact, if you're a believer in efficient market hypotheses, then you would conclude that, pretty much, active management is also largely a wasteful effort, right? And unlikely to justify the fees. Instead, the efficient market hypothesis in fact would suggest that a passive investment strategy, one that makes no effort to beat the markets. But basically, merely aim at establishing a large well diversified portfolio securities, without trying to find undervalued or over valued stocks. Right? This is because the efficient market hypothesis indicates that prices are already at their fair value, right? Given all the available information, and therefore it makes no sense to try to buy or sell individual securities. So one example of passive investment strategy would be to invest in an index fund, right? That is a fund that is created to replicate the performance of a broad base market index such as S&P 500. Okay, so in this lecture, we discussed the three different forms of the efficient market hypothesis, the weak form, the semi-strong form, and the strong form. So the efficient market hypothesis states that prices are not predictable as they already reflect all available information. And the three forms basically, differ in what counts as available information. You also saw that how efficient markets are, have very important implication as to how we should invest as an investor. In the next lecture, we're going to look at the evidence for and against efficient markets, so you can make your own informed opinion.