Value investing versus the efficient market hypothesis
to traders who sell securities with no rapid growth. This shows how new information triggers various behaviours, suggesting the market cannot reach the objective, fair value price.
Second, the efficient market assumption is also being opposed by findings of behavioural finance. EMH considers investors as entirely rational decision-making machines, which seems false. Sometimes market participants act irrationally and are susceptible to behavioural biases. 13 I would like to point out the herding bias when many investors act similarly to fit their group rather than using available information, which
may lead to financial bubbles. An illustration of this irrationality may be a 2021 story of a GameStop stock. GameStop was a videogames and electronics merchandise retailer in the USA whose financial performance declined dramatically in the 2010s due to online stores' popularity. 14 This attracted many short sellers who bet on the stock price fall. However, the stock price increased by a massive 1700% in the winter of 2021 due to the organized buying campaign of Reddit social media users. 15 Retail investors were buying the stock as one big group to support GameStop declining business
GameStop Corporation [NYSE: GME], tradingview.com
and 'punish' wealthy hedge funds. This demonstrates how herding may influence individual investors, making them ignore facts about the company and make emotional decisions, clearly pricing stocks at unfair value and contradicting EMH. Therefore, varying valuation methods and EMH's ignorance of human nature may be evidence that markets do not efficiently price securities at their fair value. Regarding the second question of the debate about profitability, I assume that EMH prefers passive investments, whereas value investing is focused on active approaches. It is common nowadays to argue against active investing, since massive hedge and mutual funds with the best financial
professionals cannot outperform the market in the long term. Indeed, in 2020 57.1% of equity funds underperformed the S&P Composite 1500 index, while in 2014 a whopping 86.9% did not manage to beat the market. 16 In terms of longer- term performance, 87 percent of active managers failed to outperform the S&P 500 over 15 years. 17
Percentage of Domestic Equity Funds Underperforming the S&P Composite 1500, Berlinda, L.; Gaurav, S. SPIVA U.S. Scorecard: 1
13 Ekanshigupta, Preetibedi, Poonamlakra 2014: 58. 14 Wikipedia. GameStop. https://en.wikipedia.org/wiki/GameStop. 15 Grassi, A. The full story behind the GameStop stock frenzy. https://inewsnetwork.net/9027/investigations/the-full- story-behind-the-gamestop-stock-frenzy/.
16 Berlinda, Gaurav 2020: 1. 17 Berlinda, Gaurav 2020: 2.
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