What is Strong-Form Efficiency?
How Does Strong-Form Efficiency Work?
There are two forms of the random walk theory. In both forms, the rapid of information is disadvantageous for investors and analysts. The semi-strong form states that public information not help an investor or analyst select undervalued securities because the has already incorporated the information into the stock price. The strong form states that no information, public or inside, benefit an investor or analyst because even inside information is reflected in the current stock price.
Why Does Strong-Form Efficiency Matter?
The strong form of the term, because it is impossible to predict stock prices. This may be controversial, but by far the most controversial aspect of the theory is its claim that analysts and professional advisors add little or no value to portfolios, especially mutual fund managers (with the notable exception of those managing that take on greater risks), and that professionally managed portfolios do not consistently outperform randomly selected portfolios with equivalent risk characteristics. As Malkiel it, " advisory services, predictions, and complicated chart patterns are useless....Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts."
Malkiel therefore advocates a buy-and-hold investing strategy as the best way to maximize returns; he also advises investors to obtain life insurance, understand their risk tolerance, make tax-advantaged , ensure their short-term keep pace with , consider investments, buy instead of rent, consider investing in gold and collectibles, use a discount broker, and diversify.