Finance Basics, part 6

Point number six is essentially the same as point number one, that equity markets are efficient in the sense that it is incredibly difficult to make money in the stock market by following simple trading strategies using publicly available information. Financial research has demonstrated many times that simple rules do not deliver superior returns, especially once the transactions costs of constant trading are taken into account. Some rules appear to have some merit and work for a while, and then they stop working and deliver stunning losses. For example, in the late 1990s momentum trading was all the rage, as the stock market was in a long-run bull market. However, none of the momentum rules picked up the peak of the market and stung many investors as the market turned into a three-year bear.

I tend to believe that the equity markets, like the bond market, are efficient in the sense that there is no easy money to be made and that prices are set by many reasonably sophisticated investors constantly searching out relevant information. However, does this mean that, like the bond market, there are corollaries in terms of interesting information we can glean from these prices? Here I think that the answers are not so obvious.