Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) suggests that financial markets are "efficient," meaning that asset prices reflect all available information at any given time. If new information arises, it is quickly absorbed, and prices adjust accordingly. This implies that it’s impossible to consistently achieve higher returns than the average market return through analysis or stock picking, as any potential advantages are already factored into prices. Therefore, EMH supports the idea of passive investing, as trying to beat the market may not yield better results than simply investing in a broad market index.
Additional Insights
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The Efficient Market Hypothesis (EMH) suggests that financial markets are "informationally efficient," meaning that asset prices reflect all available information at any given time. As a result, it's nearly impossible to consistently achieve higher returns than the overall market through expert stock picking or market timing. The theory implies that price changes are random and based on new, unpredictable information. Consequently, for most investors, a passive investment strategy—like buying and holding a diversified portfolio—tends to be more effective than trying to beat the market.