Eugene Fama is credited as the chief architect of the Efficient Market Hypothesis. A ground breaking article in the May 1970 issue of the Journal of Finance titled "Efficient Capital Markets: A Review of Theory and Empirical Work" laid the foundations for the development of the Efficient Markets thesis and, in turn, created the field of passive investing. He is a Director of Dimensional Fund Advisors, an investment advisor with $126 billion of assets under management. Fama is also an author of two widely acclaimed books: Foundations of Finance published in 1976 and another one co-authored with Nobel Laureate Merton Miller titled The Theory of Finance.
"The efficient market theory and the random walk theory aren't the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements can't be predicted from past price movements alone. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns — the returns investors require to hold stocks — are constant through time. I don't believe that. Economically, there is no reason why the expected return on the stock market has to be the same through time. It could be higher in bad times if people become more risk-averse; it could be lower in good times when people become less risk-averse."
"Correction is only something you can talk about with hindsight. An efficient market person never talks about a correction. It may turn out to be a correction, but it was not something you would have predicted in advance as a correction. How many people since 1982 have been saying that the market is too high year after year? I am glad I stayed in. That is the benefit of being an efficient market person in all this time (laughing). I never got out. There is so much mispricing out there. How is it that all of these, all the smart money cannot seem to find it.
"When it is entirely simple, it is not there. The prices are right, but there is no evidence that active managers add value. I will go back to Warren Buffett because maybe he can do it, ok. But how does he do it? He does not claim he can pick a thousand stocks or a hundred stocks. He claims he can pick one every couple of years. But even he who has taken to be the prime example of the successful active manager does not claim he can do it in general. He just claims he can do it in very few particular cases."
"If you had the right risk and return story, you'd be able to identify the kinds of information that were not incorporated into the price. There are lots of studies where people study the adjustments of stock prices to splits, earnings announcements, mergers, everything. Another way is to look at the performance of active managers. They tout themselves as people who have information that is not in the prices. Well, you can test that. Testing investment performance is basically testing market efficiency."