Bill Miller Essay

I had the opportunity of listening to a lecture by one of the hosts of “Freakonomics”, a podcast that analyzes the irregularities present in the economy. In Steven Levitt’s lecture, I was given advice to start pursuing my interests early, which led me to apply for a seminar with Morningstar- a company which specializes in fund investing. Like my microeconomics class, this seminar gave me the opportunity of expanding my knowledge in the basic principles. Furthermore, I was also taught the basics of the stock market. Towards the end of the course, my peers and I took a trip to the Morningstar tower, and I was intrigued by the goals that every worker pursued, which was to provide accurate data of which stocks would prove to be good investments.

In order to beat the market a portfolio manager must bet against it. Bill Miller had employed a “contrarian strategy” that the market was inefficient and bargains could be found through active investing. The strategy was based on lower diversification, risk taking, buying in bulk at low and falling prices, and a belief that profits could be made by exploiting a market that is irrational, pessimistic, and emotional.

Many people don’t understand the process of investing; some people think you would have to work on Wall Street in order to understand the investing process. Even though the investing world has become more confusing than ever, Joe Mansueto saw an easier way of investing. Mr. Mansueto created an organization called Morning Inc. that would demonstrate an easier way of investing. Mansueto created a format that would cut around all unessassary information and aim directly for the relevant information. The company that Joe Mansueto established main focus is to research independent information for investments, financial advisor, and intuitional advisor (Ferrell, 2009). Morningstar’s mutual fund rating service is probably the most influential fund

Value investing is a way of investing in company stocks that are considered either undervalued or out-of-favor by the market. In other word, a value investment is one where the intrinsic value of the stock is not accurately reflected in the current market valuation. The underlying reason of too much decreasing in the stock price is that the company may be losing market shares or even in trouble due to market’s panic attributed to negative rumors as well as having management problems. Since the market price has dramatically descended, the book to market

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

sider BACKGROUND Efficient market theory examines how accurately stock prices signal resource allocation alloc and fully reflect all available information. Fama (1970) introduced the efficient market hypothesis stating there are three forms of efficiency: weak, semi strong, and strong. A market semi-strong, that incorporates all historical information is said to be weak form efficient, while one that responds to all publicly available informatio is semi-strong efficient. In a semiinformation -strong efficient market, prices instantly change to reflect publicly available information. A strong form market, strong responds to all information, both public and private. The hypothesis claims that achieving above average returns on a risk adjusted basis is impossible (Fama 1970). (Fama, The lowest level of market efficiency, weak form, states that the market only reacts to historical information. This means that no one can earn above normal returns based on published historical information; however, the market does not quickly react to new public or private information. It may be possible then, in a weak form efficient market, to obtain abnormal returns form using either new publicly available or private insider information (Fama 1970). (Fama, A semi-strong form market is more efficient that a weak form, as it reacts to publicly strong available new information quickly and share prices adjust to reflect the market’s reaction. share Obtaining

The efficient-market hypothesis (EMH) is one of the well-known methods for measuring the future value of stock prices. According to this hypothesis, the market is efficient if its prices are formed on the basis of all disposable information. According to EMH if there is a possibility to predict the future price of shares, that is the first sign of an inefficient market.

The efficient markets hypothesis (EMH) is a dominant financial markets theory developed by Michael Jensen, a graduate of the University of Chicago and one of the creators of the efficient markets hypothesis, stated that, “there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis” [Jensen, 1978, 96]. This paper analyzes whether it is possible to measure if markets are efficient in the strong form of EMH. A generation ago, the efficient market hypothesis was widely accepted by academic financial economists; for example, Eugene Fama’s (1970) influential survey article, “Efficient Capital Markets.” It was generally believed that securities markets were

When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally

Efficient-market hypothesis also states that it is impossible for investors to consistently out-perform the average market returns, or in other words, “beat the market”, because the market price is generally equal to or close to the fair value (Fama, 1965). It is impossible, therefore, for investors to earn higher returns through purchasing undervalued stocks. Investors can only increase their profits by trading riskier stocks (http://www.investopedia.com/). However, empirically speaking, there is a large quantity of real financial examples to support that stocks are not always traded at their fair value. On Monday October 19, 1987, the financial markets around the world fell by over 20%, shedding a huge value in a single day (Ahsan, 2012). It serves as example that market price can diverge significantly from its fair value. In addition, Warren Buffett has

The efficient market hypothesis (EMH) has consistently remained in the forefront of finance theory for decades. As technology has advanced, the ability to assess the efficient market hypothesis has increased exponentially and so have the opportunities to exploit it. Tactics such as high frequency trading and insider trading threaten the dependability of the efficient market hypothesis. EMH is a rudimentary theory that implies the value of an asset is directly correlated or about equal to the intrinsic value of the asset. (Brigham & Houston, 2012) The intrinsic value of a stock is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors (investopedia.com, 2014). Investors use this logic to determine whether to buy or sell a stock depending on its perceived value with respect to the intrinsic value. Whether the investor employs an active or passive investment strategy, the EMH is a rational decision making process to ensure a confident investment.

The belief of the ability to make a profit by beating the market is still an economically controversial issue. Some people believe that the market is efficient, so they cannot earn more as all the stocks are at their fair prices. However, others think differently. Efficient Market Hypothesis (EMH) is know as the financial theory first developed by Professor Eugene Fama in 1970. The theory has contributed to the views of not only individual investors but also financial institutions in the capital market about the traded assets’ price relied on relevant information. In fact, this EMH theory has been controversial and disputed.

The efficient market hypothesis (EMH) has consistently remained in the forefront of finance theory for decades. As technology has advanced, the ability to assess the efficient market hypothesis has increased exponentially and so have the opportunities to exploit it. Tactics such as high frequency trading and insider trading threaten the dependability of the efficient market hypothesis. EMH is a rudimentary theory that implies the value of an asset is directly correlated or about equal to the intrinsic value of the asset. (Brigham & Houston, 2012) The intrinsic value of a stock is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors (investopedia.com). Investors use this logic to determine whether to buy or sell a stock depending on its perceived value with respect to the intrinsic value. Whether the investor employs an active or passive investment strategy, the EMH is a rational decision making process to ensure a confident investment.

Ever since Fama (1970) developed the Efficient Market Hypothesis (EMH) and defined the market efficiency as the strength to fully reveal all available information on the asset prices, there has been endless discussions around this hypothesis. As no arbitrage is implied, multiple theories are introduced to explore arbitrage activities and their limitations. Stephen Ross once said: “To make a parrot into a learned financial economist it needs to learn just one word – arbitrage.” Under the Efficient Market Hypothesis, there should be no trading techniques that yield positive, expected, risk-adjusted excess returns (Dothan, 2008), which in turn suggests the absence of arbitrage opportunity. Sharpe and Alexander (1990) defined arbitrage as the act to buy and sell the equivalent, or fundamentally comparable, security in two different markets at the same time to benefit from their price difference. Arbitrageurs normally look for mispriced securities and make profit through opposite positions. They long undervalued stocks and short overvalued stocks, creating upward and downward pressures on security prices towards their fundamental values.

According the definition of EMH, the price which shown on the stock market already were the best results that shows the company’s operating ability. Therefore, it does not matter how much effort made by the stock firm and investor, and how cautious they are. Information already reacted in the stock prices, whether it is an expensive stock or a cheaper one. It seems that how much information could be reflected in price might the distinction of different form of market efficiency. Roberts (1967) had clearly defined the difference between the weak form, semi-strong form, and strong, and it further summarised by Fama (1970) to define the information efficiency, which is: “A market in which prices always ‘fully reflect’ available information is called ‘efficient’”. In the fact that several form market efficiency act in EMH indicates that does those forms real acts in the capital market should be analysed and proved.