In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information. The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.
Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.
The EMH was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school.
It was widely accepted up until the 1990s, when behavioral finance economists, who were a fringe element, became mainstream. Empirical analyses have consistently found problems with the efficient markets hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks.
Alternative theories have proposed that cognitive biases cause these inefficiencies, leading investors to purchase overpriced growth stocks rather than value stocks. Although the efficient markets hypothesis has become controversial because substantial and lasting inefficiencies are observed, it remains a worthwhile starting point.
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.
