On The Efficient Market Theory And Random Walk Process

The random walk theory and the Efficient Market Hypothesis (EMH), which are the the foundation for almost every modern portfolio management theory taught in universities, says that stocks move randomly and nobody can outperform the market without taking more risk. I don't believe in those theories. Instead I think the theories may only be appropriate for passive investors who own a "market portfolio" or mutual funds that are managed by average managers. My own experience shows that individual stocks don't move randomly and, through researches, one can predict probabilistically whether a stock is undervalued [value-based investing] or whether it's about to start a new trend [growth and momentum-based investing].

Even if a stock does behave as a random walk, it is because of the result of work by many serious investors who are constantly seeking for profit opportunities that makes the market as a whole efficient, hence the random walk.

Even if a stock does behave as a random walk, we don't have to walk along with it. We can always intervene the process, e.g., by selecting potential winners, taking profits or cutting losses according to a chosen strategy. The outcome from such an intervened process will certainly not be a random walk. It is due to such intervention that we are able to produce excessive returns over the market.

The market is far away from being efficient. In fact it is the very inefficiency of the market that I try to explore and take advantage from.