Tesla and the efficient markets hypothesis

The Efficient Markets Hypothesis is an academic theory that posits that the optimal portfolio is an index fund.  There are different flavors of EMH but the general idea is that all relevant information about all stocks is virtually instantaneously factored into prices.  Therefore, it’s impossible for any investor to beat the index return.

The evidence in support of the theory is that almost no one who manages money for others and publishes legitimate results has an index-beating record.  Of course, the traditional brokerage strategy has been to build a strong sales force to gather fee-generating assets and to hope that performance takes care of itself.  So beating the market has never been a top goal.  I think that strategy is changing now, as younger and more savvy clients appear on the scene.

It seems to me that year-to-date performance of any US stock provides a counterexample to EMH.  I’ve been particularly impressed, if that’s the right word, about Tesla (TSLA).

 

On January 24th, TSLA closed at $564

By February 19th, 18 trading days later, the stock rose by 61% to $917

On March 18th, 20 trading days later, TSLA had fallen by 61% to $361.

By yesterday, another 20 trading days had passed and TSLA was up by 104% to $734.

So in the space of three months, a buyer at the close on 1/24 would have been:  up 61%, then down by 35% and is now up by 30%.

 

One side effect of EMH–its real purpose?–is that it legitimizes having tenured university finance faculties totally devoid of any practical investing, or even general capital markets, experience.  Other than the lack of respect, this suits professional investors fine.  Who needs extra competition.

 

 

 

 

 

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