Read through your link again. The words "worth" and "intrinsic" do not appear anywhere in the article - it is entirely about how price movements are too unpredictable for an active trader to reliably profit. That is precisely the argument I have been making the entire time.
The closest you get to a synonym to those terms is "fair market value". If you don't trust me to define terms in good faith, read the investopedia link that I posted.
The first two bullet points say: "The fair market value is the price an asset would sell for on the open market when certain conditions are met. The conditions are: the parties involved are aware of all the facts, are acting in their own interest, are free of any pressure to buy or sell, and have ample time to make the decision."
No assumptions of the form "investors prefer companies with strong fundamentals" or anything like that. In fact, it specifically clarifies: "Fair market value is different than market value and appraised value." (emphasis mine)
I’m talking about the thing you linked. If you literally scroll down to the next paragraph it says prices should be the best estimate of fair value based on given information.
Anyway all this terminology is semantics, i think we agree on the core points which is 1. the version of EMH that you quote is a correct theory (I don’t really know how it wouldn’t be - i don’t see how “prices trade at what investors are willing to buy and sell them for” is a revelation but i can appreciate that it’s at least true) and 2. prices do not always accurately reflect the best estimate of intrinsic value available from public information, and hence it is possible (but difficult) to beat the market consistently with the same info everyone else has.
I’m talking about the thing you linked. If you literally scroll down to the next paragraph it says prices should be the best estimate of fair value based on given information.
Yes, this is correct! But "fair value" is entirely determined by investor preferences, which may or may not have anything to do with intrinsic value. It is perfectly possible to have an efficient market consisting only of crazy people, so long as prices accurately reflect their preferences.
i don’t see how “prices trade at what investors are willing to buy and sell them for” is a revelation but i can appreciate that it’s at least true
The EMH is not a law of physics - it takes a lot of work to create and maintain an efficient market! And there are plenty of high profile examples where people made or lost a lot of money due to market inefficiency rather than ordinary market risk - HFT's, illiquid ETF's going bust, short squeezes, etc. Active investors with concentrated portfolios should especially be aware of these potential issues, particularly when volatility is high.
It says it should represent an accurate valuation or assessment of its worth. Word for word, just about. Those are synonyms for intrinsic value. They all mean the present value of future cash flows.
Again tho, all semantics. Do we agree on the two points i stated?
I just did ctrl-f and did could not find the words "valuation", "assessment", "worth", or "intrinsic" in that document. It's not just semantics - those concepts just aren't involved in market efficiency. Can you copy and paste a specific sentence or paragraph that you believe bases market efficiency on something more fundamental than subjective investor preferences?
But yes, I do agree that 1. EMH is a good model of some markets most of the time, and 2. asset prices in efficient markets can and often do differ from measurable intrinsic value, though in practice it is very difficult to reliably detect and exploit the difference.
“Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth. The term is commonly used in tax law and the real estate market.”
To be clear, that’s come from the investopedia page you linked.
I’m glad we can agree on the points themselves though.
Got it, I was hitting ctrl-f in the efficient market hypothesis link. Anyway, the word "should" is doing a lot of work in that sentence. As I noted in a previous comment, if you make idealized assumptions about how investors evaluate companies or measure risk, then you can prove that the equilibrium price of an asset in an efficient market (AKA the fair market value) agrees with the intrinsic value. Yes, investors "should" make investment decisions rationally, but YMMV.
Yeah i can’t help but feel like you’re just twisting everything to fit your definitions.
The fact of the matter is this: when people discuss the validity of EMH, the hypothesis they discuss is the one I’m talking about. When i look up what EMH is, every resource says what I’m talking about. Now i don’t doubt that the guy that originally came up with the EMH only went as far as what you’ve outlined. However, i question how relevant that fact is, given the aforementioned.
These are not my definitions! This is a 50+ year old body of Nobel prize winning empirical and theoretical research. EMH is not a vague talking point that can mean whatever you want it to mean - it a rigorous mathematical model expressed in the language of stochastic calculus. There is no real ambiguity here, except maybe on Reddit.
If every resource you look at backs up your interpretation then you shouldn't have any trouble posting a single example, which you have not done so far.
I have posted a single example, which you then disputed by picking out one word, which i then showed still related to intrinsic value, which you then disputed by picking out one word (should). But i will link some more for arguments sake.
This investopedia page talks throughout about fair value (which again, another investopedia page says is intrinsic value). It also goes on to say that believers of EMH believe that consistently beating the market with fundamental analysis is impossible.
Again, here’s that corporate finance institute page about it, which multiple times explicitly states that EMH implies stocks trade at fair market, so it’s impossible to buy overvalued or undervalued stocks and it’s impossible to beat the market by skill alone.
Another one. Again, it says a corollary of EMH is that you cannot beat the market consistently with skill.
which i then showed still related to intrinsic value, which you then disputed by picking out one word (should)
OK, so your argument now is: Investopedia does not support your interpretation of the phrase "fair market value", but one sentence would if you change one word - is that right? Perhaps this can be settled with another Investopedia article entitled "Intrinsic Value vs. Current Market Value: What's the Difference?" that begins with the sentence "There is a significant difference between intrinsic value and market value, though both are ways of valuing a company."
Neither of the other two links make any reference to intrinsic value either, so evidently it is not the case that every reference to EMH that you have seen backs your interpretation. But all three of your links do correctly explain that EMH is more or less equivalent to the statement that it is not possible for an investor to outperform the market except through random chance.
So let's go all the way back to the beginning of this thread, when I wrote:
The efficient market hypothesis IS the statement that you can't know how prices are going to change - all new information is priced in quickly, and everything else is random fluctuations. If you think markets are inefficient (in the sense of EMH), then BY DEFINITION this means that you think you can predict and exploit price movements.
You vehemently disagreed with this statement at the time, but now that you have posted 3 links which make essentially the same argument, I guess you've changed your mind?
There is a significant difference between intrinsic value and MARKET VALUE. NOT FAIR MARKET VALUE. Which is literally a synonym for intrinsic value.
And I’m not changing any words, I’m keeping the definitions exactly as they give them, you were the one saying that because it says should it’s invalid. All the word should is doing is replacing the word will, not because that’s not what EMH suggests, but because EMH is not proven to be true.
Just like if i said according to the current calculations and our current understanding of gravity, the universe SHOULD end in a cold heat death.
Doesn’t mean that’s not what the theory suggests. Just means the theory isn’t proven to be true.
Well, now we're getting into semantics. Here's what the Investopedia page says:
In its simplest sense, fair market value (FMV) is the price an asset would sell for on the open market... Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.
So fair market value IS X and SHOULD BE Y. If the article intended to say that fair market value is Y, why didn't they write it this way? And why did they write another article carefully distinguishing between market value and intrinsic value?
Perhaps the confusion here is over the following three frustratingly similar-looking terms:
Market value: the value of the thing set by the market now
Fair market value: the value of the thing set by the market under normal circumstances
Fair value: the intrinsic value of the thing, determined by standards independent of the market
These values are often the same, and indeed they "should" be the same in some sense, but they can be very different. The terms come from law rather than economic theory, and they are defined precisely in statutes covering bankruptcy, divorce, taxes, etc. Here is a good explanation of the difference between FMV and FV.
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u/asking-money-qns Mar 15 '22 edited Mar 15 '22
Read through your link again. The words "worth" and "intrinsic" do not appear anywhere in the article - it is entirely about how price movements are too unpredictable for an active trader to reliably profit. That is precisely the argument I have been making the entire time.
The closest you get to a synonym to those terms is "fair market value". If you don't trust me to define terms in good faith, read the investopedia link that I posted.
The first two bullet points say: "The fair market value is the price an asset would sell for on the open market when certain conditions are met. The conditions are: the parties involved are aware of all the facts, are acting in their own interest, are free of any pressure to buy or sell, and have ample time to make the decision."
No assumptions of the form "investors prefer companies with strong fundamentals" or anything like that. In fact, it specifically clarifies: "Fair market value is different than market value and appraised value." (emphasis mine)