Every morning I watch CNBC as I get ready for work in the morning. I think the best part of the show, Squawk Box, are the guests and interviewees. They literally have everyone on from the CEOs of some of the biggest companies in the world to Presidential hopefuls. There is nothing like when the main host, Joe Kernan, goes after a politician and asks the seemingly simple question of how the hell could you believe whatever he may believe/spouting? I also like watching the ticker as it shows what is being traded…and I couldn’t believe my eyes this morning when I saw a 50% drop in Green Mountain Coffee Roasters, Inc. (Owner of Keurig):
Down 47% on bad earnings and a lowered guidance for next quarter! Four Billion dollars, yes – $4,000,000,000, of value was erased in one day!
For curiosity purpose I then brought up the three year chart from the beginning of 2008 to end of 2011:
It split (2:3) twice and was up over 400%!
What is The Efficient Market Hypothesis?
According to Investopedia EMH is,
An investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
But if all the information is out there? how can any stock drop 47% in one day? how can it go up 400% in 3 years?
If the EMH says that the stock is priced correctly for the information out there, then what solace does anyone have that it won’t drop like that? Meaning what good is the theory?