The hidden truth in the efficient market hypothesis

Over the past 40 years, academic finance emphasized theories such as the efficient market hypothesis and modern portfolio. In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis, meaning stock prices evolve randomly and prices cannot be predicted using past data. 

The EMH (Efficient Market Hypothesis) stipulates that financial markets are efficient at processing information. Consequently the prices of securities are a correct representation of all information available at any time. 

But there's the twist - there are a number of assumptions and limitations that aren't always clear:

• Assumption of rationality. EMH assumes that investors act rationally but behavioral finance says otherwise: emotions, biases and herd behavior distort decisions.
• Equal access to information. EMH presumes that all market participants have equal access to information. In reality, there is information assymetry, some players have faster, deeper or privileged access to data.
• No transaction costs and unlimited arbitrage. The assumption of zero transaction costs and iffinite liquidity, doesn't hold in practical markets, especially for retailer investors. Limits to arbitrage means mispricings might remain unexploited due to risk or cost
• Short term vs long term efficiency. Markets may self-correct over time, but in the short run, mispricings (think bubbles or crashes) can persist due to irrational exuberance or panic.

The core truth is that markets are not perfectly efficient - they are imperfectly efficient. Prices tend to reflect information, but not instantly or flawlessly. That's why passive investing works well for most people (for 99% of investors) in the medium to long term, but pockets of inefficiency can still be hunted - especially with patience, insight and a tolerance for risk.