The Inefficient Market
You will see in the business press periodic mentions of the “Efficient Market Theory.” In simple terms, that theory says that any market with enough buyer and sellers and with access to sufficient information will incorporate all variables into the price at which goods and resources flow to those who value them the highest – which is to say that the market will accurately determine what the product is “worth.”
This week, we have seen a excellent evidence that the Efficient Market Theory does not work. On August 8th, the market price for a share of Apple stock was $454. As I write this on August 15th, the price is over $500 per share. That is an increase of over 10% in a week that had no significant new information about the company or its markets. So why is the company worth $45 billion more now than it was one week ago?
The only significant change is that investor Carl Icahn has announced that he invested about $1 billion in Apple stock because he believes that the company is undervalued. That is it. One famous investor says he thinks the market is inefficient with respect to a company and other investors rush to buy the stock.
To me, that means that all those other investors are simply lazy. They don’t do their own due diligence, but rather wait to see the results of the work of a famous investor (in the case, Mr. Icahn) and free ride on his investigation. If they had simply looked at the company and analyzed its numbers and prospects on their own, they could have purchase much less expensively months ago.