The Efficient Market Hypothesis (EMH) states that price of a particular security is the reflection of all information and that it should always trade at its fair value in the stock exchange. Any temporarily dislocation, for instance, a sudden spike in price for no valid reasons would be acted upon immediately by selling counter parties and price would revert back to fair value almost immediately. On the other hand, if bad news is anticipated, investors would start to sell and continue to do so until an acceptable price is reached. Eugene Fama, from whom the Hypothesis originates, makes the best case for it in his 1965 PhD thesis.
“An ‘efficient’ market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.”
The greater implication is that if the EMH holds true, then it is impossible for investors to time and beat the market on a long term basis. This is because the market is completely efficient and hence all relevant information would have been priced it. Since stocks always trade at their fair value, it is impossible to purchase undervalued stocks or sell stocks at highly inflated price. The efficiency of the market would not allow such transactions to take place.
One of the greatest investors of our time Warren Buffet makes no attempt to hide his contempt for the theory. His strategy of buying sound stocks when they are undervalued has seen his holding company Berkshire Harthaway grow by 20.3 percent compounded over the past 44 years. His famous declaration – ‘I would be a bum on the streets with a tin cup if the market was always efficient’ sums up that sentiment exactly.
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According to the Financial Times, D.I CORPORATION is a Korea-based company mainly engaged in the manufacture and sale of semiconductor inspection equipment. The Company produces semiconductor inspection equipment such as monitoring burn-in testers (MBTs), test burn-in testers (TBTs), wafer level burn-in testers (WBTs), burn-in boards (BIBs) and wafer test boards (WTBs). Its corporate website proclaims the company’s symbol to be a ladybird, with ‘the symbolism to bring good fortune’.
On the 16th July 2012, DI Corporation closed at 1560 KRW, or approximately S$1.72. Just three months later, on the 15th October 2012, it has climbed to a historical high of 13100 KRW, (S$14.4) a 840% increase in the space of three months.
While such an increase is uncommon, it is certainly not unheard of. For such a meteoric rise to be justified, one would expect the company to have pioneered a novel way to produce semiconductor inspection equipment, or has signed a massive contract that allows it to capture the worldwide semiconductor inspection market that will eventually boost the company’s earnings by more than ten times. Perhaps it is the object of a major acquisition deal or hostile takeover bid that could see its capitalisation increasing many fold. Investors, sensing the opportunity must have decided that they simply cannot get enough of the stock and continued buying it up to stratospherical heights. Fair game, I hear many say.
In reality however, the reasons for the meteoric rise in price (all 480 million of them), cannot be more surreal. On the 15th July 2012, a portly middle-aged South Korean singer by the name of Park Jae-Sang, more commonly known as Psy, launched his sixth album. A minor celebrity in his home country, Psy’s lead single Gangnam Style is a social commentary and parody of life in the affluent area of the same name in Seoul. Its catchy tune and unconventional horse riding dance routine captured the imagination of world. The music video went viral on youtube, garnering close to 500million hits in 3 months. The song topped the charts from Asia to America and Psy performed in a free concert to 80,000 adoring fans in the Seoul City Hall. Psy became an overnight sensation.
DI Corporation’s Chairman Park Won-Ho happens to be the father of Psy. By virtue of that little technicality, the company gained prominence and its share price simply exploded. He must be one proud father!
If the market is indeed efficient, such a run in price must be backed by fundamental improvements in the business of DI Corp. Up till now, no one has come out to say that is the case.
Perhaps one day Psy might be awarded a Nobel Prize for disproving the Efficient Market Hypothesis once and for all, but until then, let us rejoice in the fact that market dislocations are indeed among us in all shapes and sizes. All we need is a little ingenuity to sniff them out and persistence to follow them to good profits. In the meantime, lets Oppa Gangnam Style!