I’ve posted Entry #4 in my Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Functions Unlike Any Other Market.
Juicy Excerpt: Fama was onto something huge when he developed the Efficient Market Theory. The theory is almost valid. He just tragically left out a link in the logic chain. The stock market functions unlike any other market. You cannot use the nominal market price as something real because it is not the product of a negotiation process for all the shares outstanding at a given time. You also need to consider the playing-around factor, the extent to which investors of the day have elected to make themselves feel good (or bad) about their financial circumstances by assigning a temporary price to stocks higher (or lower) than the one that would apply if the number were determined by making reference to real financial transactions.
Fama made a mistake and then Malkiel copied his mistake and then Bogle copied the mistakes of Malkiel and Fama. We are today as a result in a big mess. The idea of rationalizing the investing project was a wonderful one. But when you get a foundational point wrong,the analytical errors must be corrected or else all of the strategic recommendations developed from following the implications of the invalid foundational point will be in error.