MPDRAAI ! (Malkiel)

“MPDRAAI” stands for “Market Prices Do Reflect All Available Information”. Burton Malkiel, the famous author of A Random Walk Down Wall Street (1973) is an unreconstructed efficient market hypothesis aficionado.

In an interview published on July 7 in BARRON’S, here , he explains that market efficiency means that there is no easy arbitrage opportunity (what others define as “the no easy money condition”) in the real economy. If you find one, pick it up fast because those opportunities aren’t going to be there for long. There are just too many smart people out there looking for arbitrage opportunities.

Many people believe, especially today, that stock markets fail to reflect all the available information and are ruled by fads and mistakes, neglecting the fact that the available information is changing all the time and reveals itself in precisely those large movements in prices that many observers believe "irrational". It’s easy to make such a claim. But if true you should be able to profit from such a situation. Can you?

Says Malkiel:
“If you think that the market doesn’t reflect important information, that means that you ought to know the information, you ought to be able to trade on that information, and you ought to be able to beat a simple index.”

Otherwise, I would add, you just believe that some important information has been neglected, but you don’t know that it has been, really. So your claim is not proven, unverifiable, most probably unfounded.

And Malkiel goes on:
“What I come down again and again is OK, if you think that, why do you persistently underperform the index? Look, stock prices are not always right, and there are a lot of people who say, “Well, I knew it.” Well, if you knew that in advance, you ought to be able to beat the index. The only market that I fond is inefficient is the local A-share market in China. In a market dominated by individual gamblers, it turns out that professionals can and do outperform. But I believe the stocks of Chinese companies traded in Hong Kong and New York are efficiently priced.”

Thanks to Greg Mankiw for signaling the interview on his blog today.