Burton Malkiel Defends the Efficient Market Hypothesis

By on April 13, 2012

CNBC’s Steve Liesman interviewed Princeton University economist Burton Malkiel, author of the excellent book A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Completely Revised and Updated) this morning.

Liesman brought up criticism of the idea of the efficient market because the perception during the financial crisis of 2008 was that markets didn’t work. This implied Malkiel was wrong and markets were not efficient. Malkiel responded, “what efficient markets means is that information gets reflected quickly and you get a tableau of prices that’s very hard to beat.”

Malkiel further defended the Efficient Market Theory by stating, “in fact, most active managers don’t beat the index and those that do in one year aren’t usually the ones that do the next year – what the Efficient Market Hypothesis does not mean is that markets are always correct.” Malkiel added, “markets are always wrong – the point is nobody knows at any one time whether it is too high, or too low.”

Malkiel stated, “the market is unbeatable, but that doesn’t mean it is always right – clearly during the dot.com bubble prices were wrong – during the recent run-up of real estate prices prices were wrong.” Malkiel added, “sure, there were some people who shorted the market and made money, but nobody can consistently beat the market – that’s the idea of the Efficient Market Hypothesis.”

Over time the market gets it more right than anybody else, according to Malkiel.

The interview (available below) continued with Liesman asking Malkiel if he was concerned about the Federal Reserve pumping up markets (Malkiel isn’t), the investment tip Malkiel gives now and why (buy a single family house), and his four major pieces of advice for investors (don’t time the market, dollar cost average, use index funds, and rebalance).

Barron Maestro: If one examines research performed by Dalbar, a Boston research firm, it is obvious that average investors make poor asset allocation decisions on a regular basis. This results in investors severely underperforming the index (or average) return over time. It goes to reason if one can take the opposing trade on a consistent basis an investor can outperform the average investor (or index) over time. It was under this premise that the Tactical Timing System (TTS) was born and the SMA portfolio initiated.

The performance of the SMA portfolio so far this year has been sub-par, but over longer time horizons the results have been good (link). However, there is no guarantee this will be the case in the future.

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