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The Efficient Market Hypothesis and equities

Will Schreiber

Dec 9, 2019

Three articles from the past three weeks:

Bridgewater Makes $1.5 Billion Options Bet on Falling Market (WSJ, November 2019)
Investors Bail on Stock Market Rally, Fleeing Funds at Record Pace (WSJ, November 2019)
Warren Buffett’s company is sitting on $122 billion in cash, which could be a bad sign (Business Insider, November 2019)

People are bracing for the pending recession. The trade war’s unpredictable. The election year is volatile. The 12-year bull run has to eventually end. Several people I know in hedge funds are betting the market declines next year.

But where is the irrational exuberance? WeWork gets rejected from public markets completely. Tesla, the most exciting technology stock in at least a decade, is the most-shorted stock on any exchange. BTC is trading 75% down from its peak two years ago. The market is flooded with money, yet returns are getting harder to find. The most popular investments among young people - unlike in 2001 - are ETF’s.

My “efficient market hypothesis” mental model is telling me that because of the negativity - the bracing-for-impact everyone seems to be doing - the downside risk of equities are already priced in.

The market is most inefficient when everyone thinks it’s efficient.