A Major Problem with the Efficient Market Hypothesis Is It Assumes Everyone Arrives at a Rational Expectations Forecast

The efficiency of the market means that the individual investor cannot outwit the market by trading on the basis of the available information. The implication of the EMH [efficient market hypothesis] is destructive for fundamental analysis, for this means that analysis of past data is of little help since whatever information this analysis will reveal is already contained in asset prices. Proponents of the EMH argue that if past data contains no information for the prediction of future prices, then it follows that there is no point in paying attention to fundamental analysis. A simple policy of random buying and holding will do the trick. One of the pioneers of the EMH who has popularized this framework is Burton G. Malkiel.

The theory holds that the market appears to adjust so quickly to information about individual stocks and the economy as a whole that no technique of selecting a portfolio — neither technical nor fundamental analysis — can consistently outperform a strategy of simply buying and holding a diversified group of securities. 

Consequently, Malkiel argues that,

A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the expert. 

The major problem with the EMH is that it assumes that all market participants arrive at a rational expectations forecast. This, however, means that all market participants have the same expectations about future securities returns. Yet, if participants are alike in the sense of having homogeneous expectations, then why should there be trade? After all, trade implies the existence of heterogeneous expectations. This is what bulls and bears are all about. A buyer expects a rise in the asset price while the seller expects a fall in the price.

—Frank Shostak, “In Defense of Fundamental Analysis: A Critique of the Efficient Market Hypothesis,” Review of Austrian Economics 10, no. 2 (1997): 28-29.