Efficient Market Hypothesis

"I'm never betting football again," my friend Jeremy said, not so much to me as to himself, after another zero for three day betting the NFL.

Whether he wanted to hear it or not, I started talking about the efficient market hypothesis. In the stock market, those who subscribe to the efficient market hypothesis believe that every bit of information is already priced into stocks and that there are no opportunities.

If the hypothesis is true, as many academics contend, how could Qualcomm, a company so well known that a sports stadium in San Diego is named after it, go from $7 to $176 in 1999?

I don't buy that markets of any kind are totally efficient, but what I have come to understand is that the more information that exists, the more efficient markets become. When I look for opportunities, I avoid things that get a lot of attention – blue-chip stocks and the NFL come to mind. In these two endeavors, with dozens of analysts and intense public interest, it's rare to find a situation in which information isn't already priced in.

When Jack Welch announced his retirement from General Electric, the news had already been priced into the stock, and even if it hadn't, it's unlikely that you would have been privy to this information before dozens of analysts were. It's also unlikely that you'll know about a player injury before it's already priced into an NFL line.

When it comes to stocks, you'll likely find inefficiencies when there isn't much information. Whether it's emerging markets or small-caps, the stocks that receive the least amount of attention have the greatest chance of being improperly valued.

For football, it's not enough to avoid the NFL and focus on college. Nationally televised games involving high-profile teams have all the appropriate information priced into the line. Your best opportunities may be in the smaller conferences, such as the MAC or the Ivy League, in which there is limited interest and scrutiny.

But it's not enough to bet on games with limited information; the key is to know something that the market doesn't already know. I know a professional gambler who subscribes to every periodical for the Central Michigan Chippewas. It's not enough for him to know statistics; he also wants to know if there was a pep rally on campus that fired up the players, if the students were in the middle of exams, or if the coach's job is in jeopardy.

When I worked as a housing coordinator in the Atlanta Olympic Village, a fire alarm went off in the dorm in which the Chinese team was staying the night before the swimming finals. Had there been a line on these events, that information would not have been priced into the line and you would have had an opportunity. Just as a horse bettor will wake up with the horses and see how they are acting that day, a sports bettor should go so far as to make sure the team flight went off without a hitch.

In poker, the best games are the ones that nobody knows about. The minute it becomes known that there is a live game, two things start to happen. The first is that good players flock to this game. The second is that the live players start to go broke and the game gets tougher. Great games rarely stay great for long, as the top players put in for table changes and the bad players go broke.

In business, the less information, the more opportunity. Sam Walton built Wal-Mart on the following premise: Go where they're not. Rather than compete against established retailers such as Sears and Woolworth, Wal-Mart built its stores in smaller towns, where the market seemed too insignificant for the bigger stores to pay attention.

Want to find the best opportunities in poker and business? Look where no else is looking.

Greg Dinkin is the author of The Poker Principle: Winning in Business No Matter What Cards You're Dealt, which will be published by Crown in April 2002. He is also the co-founder of Venture Literary (www.ventureliterary.com), where he works with writers to find publishers for their books and producers for their screenplays.