It is mostly true for large, liquid markets, at times when you do not have any insider information.
The less liquid the particular market you are looking at, the less true it is. That is, if a $100 bill is lying on the ground in a place where people dont look very often, it very well could stay there for a while, and you might have found it first if you were looking.
And if you do have insider information, that is, you know about or understand something that most of the market participants do not understand, then you might very well discover opportunities to beat the market.
A concrete example of how markets are imperfect, and the efficient market hypothesis is not a 100% true rule:
On monday afternoon, Patrick Byrne, CEO of Overstock, gave a speech in Vegas in which he announced that Overstock was partnering with Counterparty (an altcoin), for their attempt to develop a blockchain stock market.
I saw this information very shortly after it happened, and I could have immediately gone and purchased some Counterparty. But I didnt.
One hour later, Counterparty was up 40%, and I thought: well, I shouldve bought! But I guess it is priced in now. After all, the efficient market hypothesis!
Six hours later Counterparty was up 150%. (This was an overshoot and it has since settled to being up about 100% from the announcement).
It took the market close to 6 hours to account for an announcement that was made at a conference, and was posted about all over reddit and bitcoin related sites. There were essentially a whole bunch of $100 bills lying around on the ground, and it took a number of hours and a whole lot of people looking at them before they were all picked up.
Regarding the efficient market hypothesis:
It is mostly true for large, liquid markets, at times when you do not have any insider information.
The less liquid the particular market you are looking at, the less true it is. That is, if a $100 bill is lying on the ground in a place where people dont look very often, it very well could stay there for a while, and you might have found it first if you were looking.
And if you do have insider information, that is, you know about or understand something that most of the market participants do not understand, then you might very well discover opportunities to beat the market.
A concrete example of how markets are imperfect, and the efficient market hypothesis is not a 100% true rule:
On monday afternoon, Patrick Byrne, CEO of Overstock, gave a speech in Vegas in which he announced that Overstock was partnering with Counterparty (an altcoin), for their attempt to develop a blockchain stock market.
I saw this information very shortly after it happened, and I could have immediately gone and purchased some Counterparty. But I didnt.
One hour later, Counterparty was up 40%, and I thought: well, I shouldve bought! But I guess it is priced in now. After all, the efficient market hypothesis!
Six hours later Counterparty was up 150%. (This was an overshoot and it has since settled to being up about 100% from the announcement).
It took the market close to 6 hours to account for an announcement that was made at a conference, and was posted about all over reddit and bitcoin related sites. There were essentially a whole bunch of $100 bills lying around on the ground, and it took a number of hours and a whole lot of people looking at them before they were all picked up.
Figuring out how this reasoning fails a number of standard LW tenets of rationality is left as an exercise for the reader…