Is Efficient Market a Theory, Hypothesis, Fact, Law or Notion??

[photoguy]

I think the key to this discussion is how one defines valuation and risk. The EMH in my view implies that it is hard to get excess "risk adjusted" returns. I think your position (correct me if I am wrong) is that based on valuation one can time the market in a long term sense and achieve excess returns.
You wrote: "A 90 percent stock allocation is virtually risk-free when the P/E10 level is 7. Why? Because that's the lowest that stock valuations have ever gone."
I totally disagree with this statement. In the history of the U.S. market the lowest the PE10 level might have gone is 7. But certainly in other markets the PE level has gone to zero and the market has totally been wiped out. One issue that I would be very concerned with is survivorship bias -- i.e., we tend to focus on the US market but we have to be careful that we don't ignore all the other markets where the PE level hit 7 and then kept dropping. We need to include those in our estimate of risk. In March 2009, at the depths of the crisis, people certainly did believe that economic collapse had a significant > 0 probability. So I disagree that investing at PE7 is zero risk, but would rather consider it a very high level of risk. Certainly at the level of individual companies, PE7 is extremely risky and you could lose everything like GM investors.
"You cannot say that you want to Stay the Course and that you also want to practice Buy-and-Hold."
When I think of buy-and-hold I think of maintaining an allocation and not literally buying stocks and holding them forever. For example, I have invested in small-value indexes. These indexes have significant turnover as stocks either appreciate out of the index or fail and declare bankruptcy. At the stock level, I'm making many small changes but at the asset allocation level nothing is changing. I follow the EMH in this case by not trying to pick which of the small-value companies I want to hold (because I don't think this will be fruitfull) and instead try to hold all of them.
"It all goes back to that root premise. If the market is efficient, stocks are equally risky at all times"
This is certainly not true in the EMH. The EMH does not imply that all stocks are "equally risky". That would be a ludicrous inference. Clearly stocks have different risks: low p/e stocks may be risking bankruptcy, high p/e stocks have a lot of growth potential, but if they dissappoint can plumet. The thing to realize is that given how the market weighs the risk in stocks and weighs the potential gains it determines a price.
"Stocks were priced insanely high for the entire time-period from January 1996 through September 2008. If you got out in 1996, you saw a benefit. But it was also okay to get out in 1997. Or 1998. Or 1999. Or 2000. Or 2001. And so on. Anytime in that 13-year time-period worked."
I only started investing in 2001 but I stayed in all the way through to today with a very high equity portion (80%). The last time I checked my XIRR was near 9% -- this is nowhere the same as the market return. And I only invested in indexes. And remember this was the "lost decade" for stocks
"The danger is for indexers. An indexer earns the market return -- by definition."
This is also not correct. An indexer, if they make no purchases or sales, will earn the return of their index which doesn't have to be the entire market but could be that of a small segment. For example, I could hold an index in REITs and my return would not be the overall stock market return. If an indexer makes any purchases or sales, they could easily earn a return greater or less than the market because of time variation.
"Effective stock picking can beat all indexing strategies."
One of the reasons the EMH became extremely popular is that there are many studies which show that active stock selection does not beat indexing (when risk adjusted). Of course some stock pickers will beat indexing because of random variation, but the statistical expectation of both indexing and picking is the same (not including costs).

[RobBennett]

Thanks for your feedback, Photoguy.
You are of course correct that there is a risk that the stock market may go to zero. That's indeed a risk. But it is a risk that is equally present at all times if you are a long-term investor. The risk that everything would go to zero was present in 1999 every bit as much as it was in 2009, although most investors were not thinking about it as much. Also, there is no way to escape this risk. If stocks go to zero, everything goes down. So even those in CDs will lose all their money in this event. It is not a risk particular to stocks.
I am grateful to you for adding some balance to this thread. That's not something that I can pull off on my own, no matter how many words I put forward!
Rob