Question

Several celebrated investors and stock pickers frequently mentioned in the financial press have recorded huge returns on their investments over the past two decades. Is the success of these particular investors an invalidation of the EMH? Explain with a reference to real world business case.

Answer 1

It is true that several investors have made significant profits in the capital markets and that has been possible primarily due to the fact that these investors have made prudent investments and could profit from the growth in the value of the underlying businesses.

As an example, if we take the example of Warren Buffet and his investments in various firms, then we can understand that the wealth accumuated by him has been through staying the course and over many decades due to the gradual increase in size of the businesses and resulting increase in the value of the investments.

While prudent investments have proved fruitful, there are also many instances of investment not bearing fruits and firms capsizing. So it would be unfair to say that assumptions of EMH fails if few investors have made money. That is because EMH cannot provision for the future growth in business and can only account for present information. Thus, investors earning wealth do bot violate EMH.