It's what caught my eye in the note of Cochrane on Fama's work:
(1) Financial markets are, at heart, markets for information.
(2) Markets are “informationally efficient” if market prices today summarize all available information about future values.
(3) A natural implication of market efficiency is that simple trading rules
should not work, e.g. “buy when the market went up yesterday.”
(4) If markets are informationally efficient, the “fundamental analysis”
performed by investment firms has no power to pick stocks, and
professional active managers should do no better than monkeys with darts
at picking stocks portfolios.
(5) If markets are informationally efficient, then corporate news such as an
earnings announcement should be immediately reflected in stock prices,
rather than set in motion some dynamics as knowledge diffuses.
(6) For nearly 40 years, Gene Fama’s efficient market framework has provided
the organizing principle for empirical financial economics.
(7) You can get a higher return, in equilibrium, in an efficient market, but only if you shoulder more risk.
(8) The Capital Asset Pricing model (CAPM) specifies that assets can earn higher
returns if they have greater “beta” or covariance with the market
(9) Actually checking stock price reactions to corporate events is not as straightforward as it sounds.
(10) The efficient markets work of the 1960s and 1970s found that stock
returns are not predictable ("random walks") at short horizons.
(11) If expected returns and risk premiums are high, this will drive prices
down. But then the “low” price today is a good signal to the observer
that returns will be high in the future.
(12) Low prices do not cause high returns any more than the weatherman causes it to snow.
(13) The fact that the vast majority of stock market fluctuation comes from
changing expected returns rather than changing expectations of future
profits, dividends, or earnings, will fundamentally change the way we do
everything in financial economics.
(14) The key observation is that “value stocks” -- those with low prices
relative to book value -- tend to move together. Thus, buying a
portfolio of such stocks does not give one a riskless profit. It merely
moves the times at which one bears risk from a time when the market as a
whole declines, to a time when value stocks as a group decline.
(15) Once you understand the definition of efficiency and the nature of its
tests, as made clear by Gene 40 years ago, you see that the latest crash
no more "proves" lack of efficiency than did the crash of 1987, the
great slide of 1974, the crash of 1929, the panic of 1907, or the Dutch
(16) The heart of efficient markets is the statement that you cannot earn outsize returns without taking on “systematic” risk.
(17) All of us can invest in passive, low cost index funds, gaining the
benefits of wide diversification only available in the past to the super
rich (and the few super-wise among those).In turn, these vehicles have spurred the large increase in stock market
participation of the last 20 years, opening up huge funds for investment
and growth. (...)The recognition that markets are largely “efficient,” in Gene’s precise sense, was crucial to this transformation.