Semantron 23 Summer 2023

Value investing versus the efficient market hypothesis

stocks. This even further requires more patience and emotional stability from investors, which is gained from hard work in spare time.

Apart from clear flaws of EMH's assumption about market efficiency, its strategy may fail to preserve savings' purchasing power – the passive investors' primary goal. This happens as a result of periods of high inflation or currency devaluation. In contrast, value investing chooses businesses with price-setting power, thereby increasing profits along with inflation. This point is also linked to the danger of asset bubbles when the indexes experience high volatility and need years to recover. Thus, this strategy may keep investors stuck in passive investing without noticing how the purchasing power of their capital is slowly eradicating. I believe one of the greatest advantages of value investing is that it views investing as a skill, as opposed to the EMH's passive purchase of index funds. Hence, ordinary investors can investigate stocks in more depth, enhancing their analysis over time. This cultivates prudent consideration of each position, allowing investors to assess the risk and potential return in accordance with their investor profile. The second strength is its risk management, mainly relying on the concept of the margin of safety. There is a lower risk in buying undervalued securities since their prices have already lowered enough. Third, value companies usually pay substantial dividends, rewarding the investor with a stable income stream. Furthermore, dividends allow the compounding effect to fully show itself in the long term, growing the investor's wealth. On the other hand, the EMH's strategy is passive, making it easier to execute with lower transaction costs. By buying index funds, investors will not take very risky positions and be constant in their investment strategy. They will be emotionally stable because they will avoid stocks with significant volatility. In addition, EMH fully embraces broad diversification, almost eliminating the risk of individual stock bankruptcy and reducing the overall portfolio risk. In summary, the challenge in deciding a better investing approach between value investing and EMH lies in determining whether markets are efficient or not. While behavioural finance and different evaluating techniques doubt the objective fairness of market prices, value investors show that it is possible to outperform the market in the long term. Additionally, I consider the risk of asset bubbles and losing the purchasing power of savings as important enough not to favour EMH for retail investors. Instead, I am more on the side of value investing, which encourages in-depth analysis, even though it requires more effort. Along with cultivating a responsible approach to your finances, value investing provides a stream of income through dividends and an efficient risk management framework tied to the margin of safety. However, EMH still offers valuable insights like diversification's importance in decreasing portfolio risk and maintaining a consistent investment plan. The hypothesis may be helpful in bringing more attention to asset price formation and the relationship between additional risk and return. Thus, it is possible to incorporate these strengths of EMH into a retail investor's investing philosophy, too.


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