Markets can remain irrational longer than you can remain solvent — J.M. Keynes
The efficient market theory concludes that in the capital market, all prices are a reflection of its values which reflects all the information where consistent alpha generation is impossible. Based on this theory, stocks are always trade in their fair value making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or timing the market, and the only way an investor can obtain higher returns is by purchasing riskier investments.
However, this modern theory is highly controversial and often disputed.
According to the data compiled by Morningstar Inc., 10 years study beginning June 2009. The only types of actively managed funds that were able to outperform index funds even half of the time were U.S. small growth funds and emerging markets funds. Other studies have revealed that less than one in four of even the best-performing active fund managers proves capable of outperforming index funds on a consistent basis.
Traders and Investors such as John Templeton, Peter Lynch, and Paul Tudor Jones consistently generate ROI (Return on Investment) that dwarf the performance of the overall market return. This opposite the Efficient Market Hypothesis where the same people beating the market by a wide margin, over and over again. over a long span of time.
An inefficient market, is one where the value of the market is not accurately reflected in the price of the market. The inefficient in market is affected by the fear and greed in the market. When the market is bullish, investors were rush in to buy equities further drives the prices because they are feeling FOMO (This is Greed). On the other hand, when the market is bearish, investors rush to exit the market. They only return after stocks have gained substantial ground, causing investors to experience opportunity losses(This is fear).
The stock market prices is being driven either by the real economic and market expectation. The 2020 has been a crashed in the stock market especially in March where all stocks are getting hit by the corona virus pandemic announcement by WHO. At that moment, investors fear and rush to exit the market in hope they can compensate their loses with BOW (Buying on weakness). Recently , from September to December, the market are showing a reversal where from November to December the overall market (IHSG) has up for 17%! (IHSG ytd is -5%) some stocks has given bagger for the investors like BRIS , KAEF , ANTM and many more. Everyone make money in the market during that period.
The price increment or the bullish market is based on market expectation of economic recovery by the following year due to vaccine discovery in hope that can fight against the COVID-19 and as a result the economic could recover. However, in the bullish market, there will always be some drawdown as in the ending December with the new mutants of corona as the news driven. The number of Covid in Indonesia is also has not show declined as below.
There will always be a gap for value and prices of stocks. It will be a homework for investors to find out the gap in value and prices (buy under the value) and sell after the intrinsic value has been reach by conducting some due diligence and research. Investors usually set a MOS (Margin of Safety) before they decided to jump into a stocks.
The stock market it self is influenced by supply and demand where in short term, stocks often inflate or deflate due to market sentiment driven by news , irrational and unfounded expectetions from investors.
The stock market is a device to transfer money from the impatient to the patient — warren buffet
