In 1974, the great financial analyst Benjamin Graham wryly described the efficient-market hypothesis as a theory that “could have great practical importance if it coincided with reality.” Mr. Graham marveled at how Avon Products, which traded at $140 a share in 1973, had sunk below $20 in 1974: “I deny emphatically that because the market has all the information it needs to establish a correct price the prices it actually registers are in fact correct.”
Mr. Graham proposed that the price of every stock consists of two elements. One, “investment value”, measures the worth of all the cash a company will generate now and in the future. The other, the “speculative element”, is driven by sentiment and emotion: hope and greed and thrill-seeking in bull markets, fear and regret and revulsion in bear markets.
– Jason Zweig, “Inefficient Markets Are Still Hard To Beat”, The Wall Street Journal, January 9