For markets to be efficient, investors must react rationally to new information as it enters the public domain. One of the big problems with the Efficient Markets Hypothesis is that investors do some crazy things. They are not always rational!
General Motors recently emerged from bankruptcy as two new entities. There is the “new” General Motors Corp that will continue to sell cars, and there is also a Motors Liquidation Corp that owns all of the bad assets the new GM didn’t want anymore. Matt Phillips wrote an interesting column for the Wall Street Journal (click here to read it) about what happened to GM stock on the day it emerged from bankruptcy. People who still held the old stock were thrilled that GM came out of bankruptcy and bid the stock up 35%. But there was one small problem. Those GM shares have nothing to do with the company that is still selling cars. They represent ownership in Motors Liquidation Corp, which is still looking to sell all of GM’s bad assets.
The stock price reaction to GM emergence from bankruptcy was so irrational FINRA had to step in to protect all the investors that hadn’t bothered to consider what stock they owned. They changed the name to Motors Liquidation Corp and the symbol to MTLQQ to avoid any confusion. The stock promptly dropped 50%.
Investors do strange things. Humans are not hard wired to be good investors. As a result, there are market inefficiencies that a disciplined process can exploit over time.
