***I'd say most of the folks on this board are Bogleheads and there's nothing wrong with that. For most investors, you SHOULD be investing in index funds and you SHOULD NOT be trying to time the market or actively managing your portfolio. It should be the lowest cost portfolio you can find, the most tax efficient, and you should not be looking to become rich from the stock market. The way you become rich is by working your butt off, making lots of money and saving at least half of your income. The stock/bond market should just be there to allocate your savings to something that can provide an above-inflation return.***
That being said, I would like to share my thoughts on the EMH. I don't mind folks believing in it, there's plenty of evidence that it's valid. Yet there's plenty of evidence that it's not. I'd like to focus on the other side of the argument for this post.
The EMH basically states that investors are rational, that all information is immediately priced in, and there's no way to gain an edge without inside information. Strong forms of EMH says that even with inside information you still can't gain an edge. Yet there's plenty of evidence from people like Daniel Kahneman and Dick Thaler and others which shows that people are not always rational (just walk around Wal-Mart for all the evidence you need...). Kahneman showed that we have 2 systems that we use to make decisions - System 1 and System 2.
http://www.scientificamerican.com/article/kahneman-excerpt-thinking-fast-and-slow/ System 1 is very quick and fast thinking but very emotional and takes lots of shortcuts. System 2 is much more rational, conscious, slow and long-term. Investors may make decisions very quickly and choose the option that is not very rational. If a market is nothing more than a bunch of investors, and investors make poor decisions all the time, how then is the market rational? When your uncle says he's cashing in his pension near the top of the market so that he can buy the high flying stocks of the day, only to watch his account plunge in the next bear market, how is that rational? How then can we say the market is rational when it's full of idiots like your uncle?
Larry Summers created a model of an alternate financial universe where investors weren't rational and prices didn't reflect fundamental values, and you couldn't tell the difference (statistically) from a rationally random market in a 50 year period. Only in 1,000 years of data could you tell the difference. Yet it is in the past 100 years or so of stock market data that economists and finance professors use to 'show' that markets are rational and random.
EMHers may then say that there's enough rational investors out there to keep prices in line, yet we see inefficiencies all the time that don't get worked out right away. Ed Thorp figured out the Black-Scholes option pricing formula a few years before anyone else did and used it to make a lot of money. He then figured out convertible bond arbitrage and even though others eventually caught on, he still made ~20%/yr returns on it for about another 30 years before enough hedge funds did it to make returns more in line with the market. It ends up being a predator and prey type of game, where an inefficiency pops up and everyone piles in, only to create new inefficiencies in the process.
When 3Com spun off Palm Pilot in 2000, there was a period of months where 3Com was was trading cheaper than the Palm shares they owned. This went on for months because arbitragers weren't able to find enough shares of Palm to short to bring the prices back in line. Information is immediately priced in to the stock? Not always. What happens when information is released, but funds managing billions of dollars want in or out of the stock? Can they immediately buy all the stock they want or dump their shares on the market? Heck no. Those guys take weeks or months to get in and out, which creates all sorts of trends that don't look 'efficient' at all.
Other evidence comes from the guys who created the EMH themselves. Their actions don't match up with their theories, or what they say is inconsistent with a dogmatic EMH philosophy. Paul Samuelson won a nobel prize for his work on the EMH, yet he was a large investor with Warren Buffet and helped found Commodities Corp. Commodities Corp was a breeding ground for some of the best active traders the world had ever seen at the time. Most guys became price-only trend followers - buying commodities that were rising and selling ones that were falling. This was about as far from a random walk as you could get.
Eugene Fama, the godfather of the EMH, for years stood behind his beliefs that investors couldn't outsmart or outperform the market. Part of this is my belief that because he was not able to beat the market, he's spent his life proving that nobody else can either. (He tried unsuccessfully to do this in college with one of his professors). Anyways, in the '80s and '90s, after looking at the data again, he realized that beta was not enough to explain prices of stocks. He then added value, small stocks and momentum to his model to explain prices. But wait, isn't value investing and momentum trading what all those 'active' managers were doing all those years in the first place? And how do you get to throw in all these new data-mined strategies into the rational, random-walk EMH and still call it the EMH? Must be nice to be the godfather! Not to mention, Fama has been an advisor to DFA which runs value funds not too much different from the actively-managed value funds run by EMH nonbelievers.
Michael Jensen, who at one time said "no other proposition in economics which has more solid empirical evidence supporting it than the EMH," had a friendly debate with Warren Buffett. After the debate, he said "One of the things I came away from that with was Buffett was one of the smartest people I've ever met, and wise. He could play on my turn without making mistakes. It's
not by accident that he's worth billions." This is not a surprise to anyone who has followed Buffett, but this tells me that professors can stay behind the walls of their academic research and not look at the actual practitioners in the field. How can you be a staunch believer of EMH after you've spent time with Buffett, Soros, Ed Thorp or Jim Simons? To go from facts like most 'mutual funds don't outperform the market' to 'nobody can outperform the market' requires quite a bit of evidence.
And this we see with Fischer Black, who moved from MIT to Goldman Sachs - “Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.”
Now, I think one reason we still have academics hawking the EMH is that they haven't come up with a better model than CAPM to explain prices. And the guys like Shiller, Thaler and Kahneman have poked a bunch of holes in the EMH but haven't come up with a model of their own. So the professors hold onto their beloved simple model that explains everything, even though it doesn't do a great job IMO. Fama is the worst, so desperate to keep his life's work intact that he'll never admit he might have been wrong. I give the EMH about 10 years after Fama's death before it's put to rest. I don't know what will be in it's place, perhaps just a consistent belief that markets get more efficient over time, but yet still has it's times of irrationality and inefficiency. However, just because that's the case, doesn't mean you can beat it. That is a very, very difficult thing to do.