What is an efficient market? This is an abused term by players in the stock market. Don't confuse with another term - matured/immatured market as they mean different things.
Efficient Market Theory says that:
- Market prices reflect the true value of the shares with information freely available to investors as of current and future prospect of the company.
- There is no cost limitation to trading of the shares and therefore, shares are not affected by the cost incurred during the transaction.
- No third party is restricting the market transactions and thus no artificial dressing on the share values.
Generally, Malaysian market is moderately efficient or what they called 'semi-strong form efficient'. However, I am in no position to grade this efficiency as I am not a financial analyst. Our discussion here is about your choice of business in relation to the concept of market efficiency.
The recent crisis proved one thing: that a fundamentally sound company would withstand crashes. What then is a sound business? Any financial book would tell you that financial ratios like gearing, stock level, credit control, cash flow would be few to consider. But then, how these ratios have to do with market efficiency?
If market efficiency is low, that people response to changes in trend is minimal, stock indent and logistics would have less influence in the success of the business than compared to a highly market efficient business, e.g. medicine vs. fashion commodities.
If on the other hand, market efficiency is high, e.g. computers and fashionable cellular phones. Stocking any version of computer is risky because that particular generation of product will be obsolete very soon. Such a business needs minimal stocking but very efficient distribution line. These are businesses that will depend on courier services in the future.
Therefore, the type and nature of the business is determinant of the response time of it strategy and thus, its success. It is synergy that will determine the robustness of the business in the test of economic downturn. It is what bosses are paying tens of thousands per month to employ the best brains to craft strategy to withstand market competition and consumer trends.
For a layman, business that has the least market efficiency may be easier to handle than that of a business with high market efficiency. Furthermore, the higher the skills, technology and knowledge that is needed to run the business, the higher the chance that it is less vulnerable to outside forces, especially threat from a competitor.
There is one sector of business which satisfy this specification. It is knowledge based business - education. Think about the robustness of the nature of education. The market efficiency is very low - it simply means that knowing the importance of education does not change how education is managed. See how our schools changed in the past ten years? Almost nothing has changed! Imagine if education is like fashion, how much fashion has changed in the last ten years?
The good thing is that, although education has not changed, everyone knows that is a need to be educated. Since the days man learned how to write, knowledge has been documented. Since then, it has slowly influence our lives, via communication. However, there has been almost no trend. Study of law and accountancy has been there for decades.
What about market size? Education has no limits. It is everyone with a brain who would need education. And it can never get outdated. As long as there is competition in life, there is a need to be better skilled, better informed and knowledgeably equipped to survive.
In the knowledge economy that is becoming more and more important, how the world is going to judge us?
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