Rice Money Managers, Inc.

The Efficient Market Hypothesis makes two assumptions and draws a correct conclusion if (and only if) the assumptions are correct.

First Assumption: Fair Disclosure. All knowable information about the stock market and specific stocks is fully and fairly disclosed on a timely basis.

Second Assumption: Rational Analysis. As a group, investors rationally analyze the available information about stocks and about the stock market. They are not overwhelmed either by fear during bear markets or by bull market greed.

Conclusion: Stocks are Fairly Priced. If the assumptions of Fair Disclosure and Rational Analysis are correct, it follows that stocks and the stock market are fairly priced. Buying risky stocks will be appropriately rewarded over a reasonable time frame.

Criticism: Full and fair disclosure may not exist. Several commercial services sell reports of insider trading precisely because insiders are assumed to know more than outsiders. Professional analysts may be (i) overwhelmed by too much  information, (ii) just plain lazy or (iii) caught up in conflicts of interest. Greed and fear may overwhelm logical analysis for everyone.