Efficient & Rational Markets? Not a Chance!

Written by Ethan S. Braid, CFA on 8.24.2015

The trading action in the markets today was intense.  Speculators ran about like wild gazelles being hunted by lions, dashing this way and that merely at the sight of other gazelles running.  In other words, speculators were acting without thinking.  Does anyone believe that the market swings that took place today were “efficient” or carried out by “rational investors?” 

In the 1960s Professor Eugene Fama of the University Of Chicago Booth School Of Business developed the Efficient Markets Hypothesis (EMH) when completing his PhD thesis.  The EMH asserts that stock prices at any given time accurately reflect all of the relevant information available to investors.  The EMH relies upon a belief that investors as a group are rational and perceive relevant data on stocks in the same manner.  Furthermore, the EMH states that because the market is efficient no investor is able to outperform the market because there are no inefficiencies to exploit.  What nonsense!

A review of the pricing action for Intel Corporation throughout the trading day of Monday August 24th clearly shows just how irrational investors can be.

8.21.2015        Intel market cap & shr price              4:00pm:           $126 billion $26.56/shr

8.24.2015        Intel market cap & shr price              9:30am:           $119 billion $25.20/shr

8.24.2015        Intel market cap & shr price              1:10 pm:          $131 billion $27.63/shr

8.24.2015        Intel market cap & shr price              4:00pm:           $124 billion $26.29/shr

Why was Intel worth $12 billion more (a 10% increase) at 1:10pm than the company’s market value of $119 billion at 9:30am?  What caused Intel to open $7 billion lower on Monday than the company’s closing value on Friday?  In just a little over three hours time on Monday morning, Intel saw a tremendous gain in valuation of $12 billion only to then experience a $7 billion loss in valuation in the remaining three hours of the trading day.  The market was efficient?  Investors were rational?  Who are we kidding!?

There was no available information on Intel that could be used to justify such wild and dramatic swings in the company valuation.  Instead, Intel was moved by the herd of speculators buying and selling based upon their personal predictions regarding how Intel may or may not fare as data is released on China’s economy.  No doubt, a large number of speculators were influenced to buy or sell just on the basis of fear or greed after they saw the price movements in the stock.  I believe that a number of the persons who traded Intel today did so without even factoring China into the equation.  In short, speculators placing bets moved the valuation of the company, wildly, throughout the day.  This was hardly evidence of rational behavior!

What is Intel really worth is the logical question we should all be asking right now.  Is the company a deal at this valuation?  I say absolutely.  An analysis of the dividend yield, profitability margins, balance sheet strength, earnings yield, cash flow generation, innovation potential as well management’s game plan all points to a very compelling investment opportunity.  I believe that Intel is worth more than the current price it is selling at.  As an investor however, you have to be patient and willing to hold an investment such as Intel through trading days like today.  You have to be able to ignore price movements caused by speculators and be prepared to wait, years potentially, before the herd recognizes that Intel deserves a higher price than its current market value.  With the right amount of patience, there could be a significant profit opportunity for Intel investors that would certainly defy the EMH. 

Ethan S. Braid, CFA


HighPass Asset Management

800 – 672 - 7916        


About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr. Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 63 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.