1. I willfully don't define "long run", as I'm certain you economists can do this better! Please edify me on a reasonable number, and I can edit this post.

  2. I quote Malkiel's definition of "semi-strong" beneath. As he doesn't believe in the EMH's strong form, and he knows far more about finance than I, I too don't believe in it.

  3. Doesn't the EMH's semi-strong form jar with explanations on Personal Finance SE on why stocks can be expected to rise in the long run?

Burton Malkiel. A Random Walk Down Wall Street (12 edn 2019). Anyone know the page numbers?


The academic community has rendered its judgment. Fundamental analysis is no better than technical analysis in enabling investors to capture above-average returns. Nevertheless, given its propensity for splitting hairs, the academic community soon fell to quarreling over the precise definition of fundamental information. Some said it was what is known now; others said it extended to the hereafter. It was at this point that what began as the strong form of the efficient-market hypothesis split into two. The “semi-strong” form says that no public information will help the analyst select undervalued securities. The argument here is that the structure of market prices already takes into account any public information that may be contained in balance sheets, income statements, dividends, and so forth; professional analyses of these data will be useless. The “strong” form says that absolutely nothing that is known or even knowable about a company will benefit the fundamental analyst. According to the strong form of the theory, not even “inside” information can help the investors.
      The strong form of the EMH is obviously an overstatement. It does not admit the possibility of gaining from inside information. Nathan Rothschild made millions in the market when his carrier pigeons brought him the first news of Wellington’s victory at Waterloo before other traders were aware of the victory. But today, the information superhighway carries news far more swiftly than carrier pigeons. And Regulation FD (Fair Disclosure) requires companies to make prompt public announcements of any material news items that may affect the price of their stock. Moreover, insiders who do profit from trading on the basis of nonpublic information are breaking the law. The Nobel laureate Paul Samuelson summed up the situation as follows:

If intelligent people are constantly shopping around for good value, selling those stocks they think will turn out to be overvalued and buying those they expect are now undervalued, the result of this action by intelligent investors will be to have existing stock prices already have discounted in them an allowance for their future prospects. Hence, to the passive investor, who does not himself search for under- and overvalued situations, there will be presented a pattern of stock prices that makes one stock about as good or bad a buy as another. To that passive investor, chance alone would be as good a method of selection as anything else.

      This is a statement of the EMH—the efficient-market hypothesis. The “narrow” (weak) form of the EMH says that technical analysis—looking at past stock prices—cannot help investors. Prices move from period to period very much like a random walk. The “broad” (semi-strong and strong) forms state that fundamental analysis is not helpful either. All that is known concerning the expected growth of the company’s earnings and dividends, all of the possible favorable and unfavorable developments affecting the company that might be studied by the fundamental analyst, is already reflected in the price of the company’s stock. Thus, purchasing a fund holding all the stocks in a broad-based index will produce a portfolio that can be expected to do as well as any managed by professional security analysts.

  • $\begingroup$ Hi: EMH doesn't say that greater risks can't result in greater returns. So, if you invest in stocks, you might make more money in the long run but there's risk involved so it doesn't contradict either form of the EMH. EMH says that you can't make money ( above market ) and not increase risk so it's not a contradiction to experience positive long run returns on stocks. CAPM supports the latter. – mark leeds yesterday $\endgroup$
    – mark leeds
    Jun 28, 2019 at 6:00

2 Answers 2


I do not see the contradiction here:

  • The stock indices generally increase in the long run, because of the growth of the global economy (or local economy in the case of one national index). This increase is believed to be about 4-6% per year in real terms (market premium + risk-free returns in real terms) on the long run. (global average)
  • The EMH semi-strong form merely states, that you can not systematically exploit the public fundamental information (for example quarterly reports, news which might affect future earning) arising on an equity to outsmart the market, and be faster than the rest when buying and selling. Because the market, as a collective entity, is incredibly fast at assimilating these kinds of information.

But you still can expect a positive return on a individual stock based on its risk factor, just not more than that. These expected, and risk-and-time compensating positive returns are aggregated in the indices, and these produce the long-run average growth.

  • 2
    $\begingroup$ 'because of the growth of the global economy (or local economy in the case of one national index)': Isn't this public fundamental information? Isn't this growth priced into stock indices? $\endgroup$
    – user4020
    Jul 5, 2019 at 23:48
  • 1
    $\begingroup$ Hi: factor exposures ( atleast in theory ) are not priced in so, if you bet on a factor ( say P/E ), that bet has risk, so you get a risk premium in the form of long term returns to that factor. But there's risk so it still doesn't contradict EMH. EMH says that you can't make risk free money because, as you said, all that info-knowledge is priced in. $\endgroup$
    – mark leeds
    Jul 6, 2019 at 2:40
  • $\begingroup$ @Greek-Area51Proposal yes it is public information, but as mark-leeds is telling, it is not priced in to completely zero out the expected mean returns on stocks. From the view of the EMH, to be able to exploit some information pertains to the so called alpha, or surplus value which you get above the expected positive returns or normal profit - which can be expressed with a model like CAPM. When every information in priced in as the EMH says, imagine this positive normal profit as the minimum fair return, that everyone deserves for keeping that stock and bearing risks - benchmark of the minima $\endgroup$
    – Betelgeux
    Jul 6, 2019 at 8:48
  • 1
    $\begingroup$ Hi: Maybe this is the best way to clarify: CAPM says: you can increase your expected return by taking more risk. EMH says: It's not possible to increase your expected return unless you increase your risk. These are not contradictory theories. $\endgroup$
    – mark leeds
    Jul 6, 2019 at 15:57
  • $\begingroup$ @markleeds Let me try to rewrite your summary of EMH without 'unless': EMH says: It's impossible to increase your expected return if you don't increase your risk. $\endgroup$
    – user4020
    Jul 12, 2019 at 2:47

The two propositions here are:

  1. EMH: I can't predict which stocks will do better than average.
  2. The average stock will increase in the long run.

1 does not contradict 2.

Analogy: I am in a room full of babies.

  1. EMH: I can't predict which of these babies will be the tallest in 20 years.
  2. Nonetheless, I can predict that in 20 years, these babies will be taller than they are today.

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