In the 1980s, academics challenged the theory. And the October 1987 stock market crash left economists, money managers, and investors asking: "Did the market accurately reflect all publicly available information about these companies before the crash? If so, how could the crash have happened?"
Even Malkiel himself admitted in the sixth edition of A Random Walk (published in 1995) that "while the reports of the death of the efficient-market theory are vastly exaggerated, there do seem to be some techniques of stock selection that may tilt the odds of success in favor of the individual investor."
Some of the more-notable studies that threw the weak-form EMH into question included research by Eugene Fama and Kenneth French. The duo found that buying stocks that have performed poorly during the past few years led to superior returns over the next few years. In other words, a strategy of buying unpopular stocks can lead to better results than a strategy of buying popular stocks. That's because the market can get carried away with fashionable stocks, and pessimism can be overdone.
Academics uncovered stock-market patterns that questioned the semi-strong EMH, too. They found that stocks with low price/earnings and/or price/book multiples produce above-average returns over time.
Finally, researchers have shown how stock splits, dividend increases, insider buying, and merger announcements can dramatically affect stock prices, thereby proving false the strongest-form EMH.
The Upshot >>