Whisperers Versus Analysts and Implications for Market Efficiency

Abstract

Before we compare and contrast message board stock opinions with financial analyst stock recommendations, we must first understand the definition of market efficiency and to what extent these different recommendations impact the efficient market hypothesis (EMH). It is generally believed that financial markets are efficient in reflecting information about individual stocks and the market as a whole. If the market is efficient enough according to Fama (1970), when information arrives, it spreads very quickly (if not instantly) and is reflected in the prices of securities without delay. Therefore, neither technical analysis (i.e., a study of past stock price patterns in an attempt to predict future prices), nor fundamental analysis (the study of contemporaneous financial information to identify mispriced stocks) would enable an investor to obtain significantly higher returns than those holding a randomly selected portfolio of securities, ceteris paribus.