TRUE DOLLAR JOURNAL

Note: The live data table is at the end.

Years ago, eggheads Paul Samuelson and Eugene Fama took ideas from a late nineteenth  and early twentith century French mathematican egghead, Louis Bachelier, and published works that would lead to Efficient Market Hypothesis (EMH).



According to their EMH, stock prices reflect fully all information and thus stocks always trade at their fair valuation on stock exchanges. By EMH, it should be impossible to outperform any stock market through stock selection based upon either fundamentals or market-timing strategies.

If this is so, it would be impossible for speculators to win excess returns by going long or by shorting since neither underpriced stocks nor overpriced can exist according to the theory. In other words, you can not beat the market.

Further, the only way a speculator could gain higher returns is by betting on firm whose executives engage in riskier action.

On its face, EMH seems right considering that speculators who gain information advantage will buy or sell based on their advantage. The cumulative effect of all action by speculators with information advantage will reflect in the price of any stock. The price of any stock can move only in response to news revealed to all at the same time.

Why Could the EMH Be Wrong?

The propaganda of misinformation could lead speculators astray. Many US agencies produce reams of data, much of it expressed in nominal terms or worse in "real" dollar terms.

As I have shown elsewhere on the True Dollar Journal, the concept of real GDP is false precisely because current GDP gets deflated by a base composed of past inflated GDP. Calculating in that way is like measuring a length with an ever expanding ruler.

Information producers of the advertising-based media have vested interests in securing eyeballs whether readership or viewership. Therefore, what they produce is entertainment based upon a smattering of facts rather than reporting bald facts. Financial News as information could be highly sensationalized and thus easily mislead the gullible.

Are the Advocates of the EMH Right?

If all information were calculated into the price of stocks, then all speculators should be neutral with respect to ownership because the worth of a dollar of revenue earned by a firm should be the same regardless of what products get sold and in what industry any firm produces.

Actual data tells another story. Speculators are biased.

Many speculators believe a dollar of revenue earned by some firms is worth more than a dollar of revenue earned by other firms. In short, many speculators pay premiums for the stocks of firms. In other words, many speculators are irrational and prefer some stocks over others based on something other than public information.

From public financial data of S&P 500 firms, I have calculated the consensus belief about the worth of one dollar of revenue. As you can see in the table below, the public overstates the worth of many firms while understating the worth of many other firms.

In my method, I have normalized the public valuation of each firm (market capitalization), against a benchmark, which produces an estimated stock price. An average of public valuation of revenue comprises the benchmark. The averaging of the benchmark only considers values that fall between the 95th percentile and 5th percentile of numbers in the dataset.

At this time, I remind you read the disclaimer notice of the True Dollar Journal. The table below is not published buy or sell financial advice. It reflects the work of learned opinion.

Live Data

The table takes live data.

As you can see in the next view, for less than five percent of the stocks, do the speculating public have accurate assessment of stock prices.

What Could be Wrong with My Method?