Random walk may not be as random...

In an efficient market, the price of security at any point of time will reflect it’s intrinsic value. However, since the price cannot be precisely pinned down, the actual price movement will wander randomly around the intrinsic value. The prices will also adjust to new information about the stock. However there are couple of observations here, from the perspective of the theory of random walks.

• Given a large sample size, the market will over-react as frequently as it will under-react.
• The price changes before the news will be as frequent as the changes after the news.

So the theory of random walks states that, even the market reaction cannot be utilized for profit making, since it’s behaviour is also random.

Norman G. Fosback (Author of Stock Market Logic) puts a powerful argument in favour of predictability. As per his view, the random walk theory solely focuses on the short term movements of stocks. The long term trends definitely display recognizable patterns.

I think this is a strong argument and deserves a more thorough analysis. From my viewpoint; in long term, a strong company will show more resilience to (specially poor) economic conditions.

This may OR may not reflect in the price movement in stock market (I have not investigated this, so it would be premature to say anything with confidence).