Tune Out the Noise: Why the Efficient Market Hypothesis Still Matters
The Efficient Market Hypothesis (EMH) is one of the most debated ideas in modern finance. Popularized in the mid-20th century and featured prominently in the documentary Tune Out the Noise, it suggests that markets are generally efficient — meaning prices reflect all available information.
That idea challenged the very foundation of Wall Street at the time. If markets are efficient, then no investor — no matter how skilled — can consistently outperform them once risk is adjusted. It also paved the way for one of the most enduring investment philosophies: passive indexing.
But decades later, after financial crises, inflation shocks, and the rise of AI-driven innovation, does the theory still hold up?
The Origins of Efficient Markets
The 1960s were a golden age for financial research. For the first time, economists could analyze vast data sets with the help of emerging computing power. What they found changed investing forever: markets are largely unpredictable because they reflect an enormous amount of collective information.
That unpredictability isn’t a flaw — it’s a defining feature of how markets process new information. Each new development, from global events to corporate announcements, instantly ripples through prices.
As Deon explained in our conversation, the genius of EMH wasn’t that it made investing simple, but that it acknowledged how complex and random markets truly are. No single person or manager can account for every innovation, shock, or macroeconomic shift.
Why Passive Investing Still Works
A common misconception about EMH is that it limits returns. In reality, it limits excess returns — the kind that outperform the market without taking on additional risk.
You can still earn higher returns by accepting higher volatility or illiquidity, but the data continues to show that, on average, passive investors outperform most active managers. Roughly three-quarters of actively managed funds underperform broad index benchmarks like the S&P 500 over time.
The logic is simple: if no one can reliably predict macro shocks — think the 2008 financial crisis or the pandemic recovery — then it’s better to participate in the overall market than to try to outguess it.
Can Markets Become “Too Indexed”?
Some worry that if too many investors choose passive strategies, markets could lose efficiency. In theory, if everyone indexed, prices would stop reflecting fundamental information.
In practice, competition keeps that balance intact. If inefficiencies ever became large enough to create opportunities, active managers would exploit them — restoring equilibrium. As long as price competition exists, markets remain efficient enough to justify passive investing as a core strategy.
What About Innovation and Large-Cap Growth?
Recent years have raised new questions about efficiency. If small-cap value stocks historically carried higher risk and higher expected returns, how do we explain the dominance of large-cap growth names like Nvidia, Apple, and Microsoft?
The answer lies in how innovation has evolved. Today’s breakthroughs — from AI to data infrastructure — demand enormous capital. Unlike earlier eras when small startups drove technological change, many of today’s biggest innovations are being developed by trillion-dollar firms capable of making multi-billion-dollar bets.
That concentration doesn’t disprove the efficient market hypothesis — it simply shifts where risk resides. Large-cap companies are now taking on much of the innovation risk that once lived in the small-cap segment.
The Core Lesson: Predicting Winners Is Still Impossible
From electricity in the 1920s to the internet in the 1990s, every technological revolution has sparked speculation about who will emerge as the next great winner. Sometimes investors get it right — often, they don’t.
The timing, scale, and outcome of innovation are all uncertain. Which is why, as Deon summed up, if you can’t pick the winners, you buy the index.
The efficient market hypothesis isn’t outdated — it’s foundational. Despite crises, innovation, and market shifts, one truth remains: no one can consistently predict where the next opportunity or disruption will come from.
For long-term investors, tuning out the noise and staying diversified is still one of the most effective strategies there is.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on efficient markets, passive investing, and portfolio discipline, listen to the full episode here.