The Efficient Market Hypothesis, known as EMH in the investment community, is one of the underlying reasons investors may choose a passive investing strategy.
There are 3 forms of the efficient market hypothesis:
When people talk of efficient markets, they are describing a situation in which all the decisions of market participants are completely rational and that they consider all of the information available.
EMH believes this to be true and so states that the market price will always be completely accurate, as all new information will be priced in immediately.
EMH argues that the only volatile movements occur after unexpected news, but that once the information is digested, the efficient market resumes.
The efficient market hypothesis does not imply that investors can’t outperform the market, it believes that there are always outliers beating the market averages, together with those who dramatically lose to the market. Still, the majority is closer to the median.