There is evidence to support the reasoning behind the efficient market hypothesis, but the basic conclusion drawn from the theory does not logically follow from it and is mistaken. The efficient market hypothesis essentially theorizes that market efficiency causes stock prices to accurately reflect all available information at any given time. The strongest version of the theory is that all relevant information for stock share prices is already reflected in the current market price. A somewhat less ambitious variation of the theory is that all relevant public information is always reflected in market share prices and the market nearly instantly adjusts for any previously private or insider information once it becomes publicly known. In essence, market trading is efficient in that it leads to the current market price at any given point in time accurately reflecting the actual value of a stock or other investment asset.
Evidence from market action certainly supports the theory. A common occurrence in markets is the release of what is interpreted as negative news for a market being followed not by a drop in price but by basically a nonreaction followed by a rise in price. Traders and analysts frequently explain this away by saying the market already priced in the bad news prior to its public release.
However, even if the hypothesis is essentially correct, the major conclusion drawn from it, that it is therefore impossible for a trader to "beat the market" consistently, is wrong. The theory is that since market price always reflects actual market value, one cannot ever, for example, buy an undervalued stock since, according to the hypothesis, while a stock might appear undervalued, it is in fact properly valued at any given point in time. From this conclusion, which is a bit questionable in itself, subscribers to the efficient market hypothesis then make the unwarranted, illogical leap to the broader conclusion that market efficiency means that no investor can consistently outperform the overall market average return on investment.
Such a definitive conclusion about possible investor performance simply does not logically follow from the premises of the theory. Even granting the idea that current market share price always accurately reflects actual market value, this does not preclude the possibility of a given individual investor or portfolio manager being able to consistently profit from the changes in market price that do occur. There is nothing in the efficient market hypothesis theory that logically leads to the conclusion that it is not possible for an investor or analyst to, for example, do some fundamental analysis and accurately speculate before the fact on the widespread success of Internet usage and make a fortune by buying Google stock at $30 a share.
In fact, numerous investors have demonstrated their ability to consistently outperform the market over time, including Paul Tudor Jones, John Templeton, George Soros and Warren Buffett. While there is evidence that market price at any given time does indeed efficiently incorporate all relevant information, facts show it is a mistake, an error in logic, to draw the conclusion that shrewd investors cannot consistently outperform the market.