Market Efficiency Takes Time... So You Need to Think Long-Term

Introduction: Why Patience Matters

You’ve probably heard the phrase, “The market is always right.” But why is it?

While prices may generally reflect available information, the short-term picture can be a rollercoaster; bumpy, emotional, and full of surprises. In contrast, over the long haul, the market tends to correct itself. Prices realign with fundamentals, and those with a patient, disciplined strategy often come out ahead.

Financial markets are often described as “efficient,” meaning prices quickly reflect all available information. Yet, anyone who’s watched markets day-to-day knows prices can swing wildly in the short term for reasons that have little to do with fundamental value. Stocks can be undervalued or overvalued for extended periods. Why? Because market efficiency takes time – and that’s exactly why investors need a long-term perspective. In the short-to-medium term, various inefficiencies and investor behaviours can push prices away from fair value. Over the long run, however, markets tend to self-correct and converge toward fundamentals.

Legendary investor Warren Buffett calls blind faith in the Efficient Market Hypothesis (EMH) a "terrible, terrible mistake" (Why Warren Buffett Calls This Common Investing Approach a 'Terrible, Terrible Mistake'). This post explores how market inefficiencies arise, what they mean for investors, and how one can approach changing market conditions. 

Understanding Market Efficiency: Theory vs. Reality

The Efficient Market Hypothesis (EMH), famously articulated by economist Eugene Fama, argues that financial markets are highly informationally efficient. In an ideal efficient market, asset prices instantly and fully reflect all available information about fundamentals. Under EMH, consistently beating the market is virtually impossible because any new information is swiftly incorporated into stock prices – thus, no persistently undervalued or overvalued assets should exist. There are three levels of EMH:

While EMH provides a useful theoretical framework, reality tells a messier story. Even Fama acknowledged that “market efficiency” is hard to define or measure perfectly. In practice, markets do display inefficiencies. Prices sometimes do not accurately reflect true value due to various frictions.

For example, information may disseminate unevenly (called "info asymmetry"), or there may be transaction costs, liquidity constraints, or behavioral biases at play. Real markets are composed of humans (and algorithms programmed by humans), so emotions and cognitive biases can lead to mispricings. Indeed, skeptics of pure efficiency point out that if all prices were always fair, value investors like Warren Buffett couldn’t consistently profit by buying undervalued stocks and selling when prices correct to intrinsic value. The very existence of successful active investors, and the fees they charge, suggests that some inefficiencies persist.

 Consider these examples:

• The Dotcom Bubble of the early 2000s
• The 2008 financial crisis
• 2011 Eurozone Crisis 
• Covid-19 Crash

These were classic cases of irrational exuberance and widespread mispricing—proof that markets are not always perfectly efficient.

In fact, even Nobel laureates like Robert Shiller have critiqued EMH using behavioural finance insights. The Grossman-Stiglitz Paradox even argues that if markets were perfectly efficient, there would be no incentive for anyone to gather information in the first place (Market Efficiency – CFA Institute Refresher Readings).

What Are Market Inefficiencies and Why Do They Exist?

If markets were driven purely by Vulcan-like rational investors, inefficiencies would be minimal. In reality, markets are driven by humans, and humans are not always rational. Behavioural finance studies how psychological biases and herd behaviour affect investor decisions and thus asset prices. These insights help explain why markets can stray from fair value – and why patience can pay off when others panic or get greedy. Researchers have identified dozens of behavioural biases, but a few stand out for their powerful role in creating persistent market anomalies, patterns that deviate from what the Efficient Market Hypothesis would predict.

These biases distort how investors interpret information, take risks, or follow trends, ultimately leading to mispricings and overreactions that can persist. In other words, they help explain why markets can be inefficient.

Examples of Behavioural Biases That Drive Market Inefficiency

• Herding: The urge to follow the crowd leads investors to chase popular assets, not because of fundamentals, but because “everyone else is doing it.” This behaviour fuels bubbles and sharp crashes, as seen in the 2017 Bitcoin frenzy or 2021 meme stocks. Herding pushes prices to irrational extremes, with many investors feeling safer losing money if “everyone owns it.”
• Overconfidence: Many investors overrate their skill or knowledge, leading to excessive trading or bold positions. Believing they’re right and the market is wrong, overconfident traders can misprice assets by clinging to flawed views. This bias is widespread, from beginners to professionals, and often delays prices from correcting to fair value.
• Loss Aversion and Fear: People hate losing more than they enjoy winning. This causes panic selling during downturns (e.g., COVID-19 in March 2020), as investors rush to cut losses—often overshooting fundamentals. It also drives poor decisions like holding onto losers too long or selling winners too soon, both of which distort prices.
• Greed and Euphoria: In bull markets, rational thinking gives way to “this time is different” optimism. Investors chase sky-high prices during bubbles, like the dot-com era, only for reality to eventually trigger a crash.
• Attention Bias and Short-Termism: Investors often chase what's in the headlines or recently performed well, driving up prices of trendy stocks while ignoring long-term value in overlooked ones. A company missing earnings by a penny might drop 10% due to short-term trading, even if its fundamentals remain solid.

These biases don’t just create noise, they often manifest as recognizable, recurring patterns in asset prices.  Below are some of the most well-documented market anomalies that stem from these inefficiencies. Traders and analysts hunt for these inefficiencies using models, signals, and strategies (What Is an Inefficient Market?, Market Inefficiencies, Behavioral Funds: What They Are, How They Work). 

However, it is critical to point out that anomalies often diminish or disappear once widely known and exploited, indicating evolving market efficiency. 

Implications for Investors:

Understanding these behavioural tendencies is key to not falling victim to inefficiencies. For a patient long-term investor, short-term market swings driven by fear or euphoria can present opportunities. For example, if herd panic drives a good stock far below fair value, a contrarian investor can buy at a discount and wait for the eventual rebound. Likewise, recognizing one’s own biases – avoiding overconfidence and not chasing the crowd – can help you avoid buying into bubbles or selling in a crash.

This leads to our principle #6: Think Long-Term, Stay Unemotional

“Most investors are too emotional, too myopic, and too focused on the short-term… Acting on these instincts almost always damages long-term returns”

Behavioural finance ultimately strengthens the case for long-term investing: In the short run, emotions dominate and prices swing; in the long run, fundamentals and rational valuation tend to prevail once the dust of emotional trading settles.

Long-Term Equilibrium and Mean Reversion: The Gravity of Fundamentals

One of the core ideas behind long-term investing is mean reversion, the tendency for prices to return to their historical averages or intrinsic value over time. Think of it this way: fundamentals are like gravity. Prices can float above or fall below fair value for a while, but eventually, gravity pulls them back down, or lifts them up, toward where they truly belong.

In the short term, markets act like a voting machine, prices are swayed by trends, hype, fear, and excitement. But over time, they become more like a weighing machine, judging the real worth of a company based on its earnings and fundamentals - a concept popularized by Benjamin Graham.

While prices can drift due to supply and demand imbalances or emotional reactions, those very inefficiencies create opportunities. Undervalued assets attract bargain hunters. Overpriced stocks eventually disappoint or face scrutiny. These reactions help steer prices back to their true value. This is where patience pays off. Over time, markets tend to revert to their long-term average or fundamental value, a concept called mean reversion.

Historical Examples of Mean Reversion

• Dot-Com Bubble (1999–2002): In the late ’90s, tech stocks soared on hype, not profits. Many companies had no earnings, yet were priced as if they’d soon dominate the world. This disconnect couldn’t last. When the bubble burst, the Nasdaq fell nearly 80%.
• Global Financial Crisis (2008–2009): In late 2008, fear gripped markets and the S&P 500 dropped over 50%. Stocks were priced for a depression that never fully came. Panic led to bargains, investment-grade bonds were extremely cheap, and many solid companies traded far below fair value. As the economy recovered, so did prices, rewarding long-term investors who stayed calm or bought when fear was at its peak.
• COVID-19 Crash and Rebound (2020): Markets plunged 30–35% in weeks as the pandemic hit. Prices collapsed indiscriminately, even healthy companies were caught in the selloff. But with massive stimulus and faster-than-expected recovery, markets snapped back. The S&P 500 returned to its pre-crash high within five months.
• Valuation Cycles: Beyond crises, valuations like price-to-earnings ratios also revert to the mean. High valuations, like during the 1999 tech boom or the 2020 growth stock surge, often lead to lower future returns. Low valuations like in 2009 or early 2020 tend to precede stronger performance. 

Mean reversion isn’t a quick fix. It plays out over time. Prices don’t snap back to fair value overnight, and some mispricings can last for years. A good example is Japan’s stock market, which peaked in 1989 at unsustainable levels and then spent decades gradually correcting. But in a diversified portfolio, extreme performance, good or bad, tends to even out over the long run.

How Equilibrium Is Restored:
Over time, stock prices are pulled back to reality by fundamentals like earnings, dividends, and economic growth. When prices drift too far from value, markets begin to self-correct. Value investors step in, companies buy back shares or issue new ones, and new information helps reduce uncertainty. These forces work together to bring prices back in line with their true worth.

At SciVest, we believe that while markets can be wildly inefficient in the short term, they tend to become efficient in the long run. That's why our core belief #7: Exploit Market Inefficiencies emphasizes patience

In the short to medium-term, many securities and even entire markets may not reflect fundamental fair value, sometimes diverging significantly from it. This suggests that financial markets are not "efficient". However, over the long-term, the value of securities generally re-align with their fundamental fair value, indicating that financial markets become "efficient" in the long-term. These market inefficiencies can then become investment opportunities.

The key takeaway for investors is to not get discouraged if a solid investment is temporarily out of favour, mean reversion takes time. Additionally, don’t chase high-flying assets that have lost touch with reality, gravity eventually wins!

Active vs. Passive: What's Better in Inefficient Markets?

The debate between active and passive investing is fundamentally about market efficiency. At the core of this discussion is a simple idea: Can you consistently find mispriced assets and earn above-average returns?

• If markets are efficient, then all known information is already priced in. That means there are no "bargains" to be found, and active managers have little chance of outperforming consistently - especially after fees. In this case, passive investing makes more sense. Your investments simply track the market at low cost, accepting the average return.
  
  
• If markets are inefficient, then prices can deviate from true value due to fear, hype, information gaps, or behavioural biases. This opens the door for active managers to uncover undervalued opportunities and avoid overpriced ones. In these situations, skilled and disciplined active investing can add real value.

So the debate really hinges on this:
Do you believe markets always get it right or not?

At SciVest, we take a balanced view:

Markets can’t be beaten easily or often, especially after fees. But they aren’t always efficient, short-term dislocations and behavioural biases create real opportunities. That’s where disciplined, research-driven active strategies matter.

We believe active investing works when guided by our core principles:

• Stay long-term and unemotional
• Focus on fundamentals
• Avoid chasing trends or reacting to noise
• Be diversified and risk-aware

In other words, don’t swing for the fences on every trade. A balanced stance and one that SciVest embraces is: accept that markets are very hard to beat, especially after costs. Don’t assume you can trade your way to fortune quickly. If you do pursue active opportunities, do so patiently and informedly, and maybe only with a portion of your assets. Meanwhile, keep the core of your portfolio well-diversified and aligned with long-term growth.

Conclusion: Time Rewards the Patient

Markets can be maddening in the short run. Prices gyrate, headlines terrify, fads take off. Inefficiencies are real – stocks can stray far from fair value due to human behaviour and temporary dislocations. However, as we’ve seen, market efficiency is a matter of when, not if. Given enough time, the market has a remarkable tendency to self-correct and gravitate toward fundamental value. This means that as investors, our best course is to embrace a long-term mindset.

Markets aren’t perfectly efficient, at least not in the short term. Prices can swing wildly based on emotion, news, or speculation. But over time, fundamentals tend to win out by:

• Understanding the limits of EMH,
• Recognizing and respecting market anomalies,
• Taking a long term growth approach ,

You can tilt the odds in your favour.