Random Walk Hypothesis- predicting Financial Market trends

There are thousands of financial analysts working in big firms trying to outperform the stock market and it’s future with fundamental and technical skills. But the Random Walk Theory is a thinking that disregards all of the effort.

Simply put, the Random walk theory is a method used in financial markets which states that the prices of the securities follow no detectable trend i.e. are a random walk.

It states that any past trend of stock/ market cannot be used to predict it’s future. Think for yourself, did you ever think there would be a pandemic where you would see stocks of pharmaceutical companies in midst of a bull run with the big hefty nifty 50 ones, where every investor is trying to invest in it?

Well, yeah, that’s what the theory explains.

Investors who believe in this theory generally invest in the securities that define the whole market,and use the buy and hold strategy(for the long run) as markets can usually be interpreted in the short run.

One more theory, which is the Efficient Market Hypothesis is often confused with this one. While the former suggests that all the relevant information is used to estimate the price of a security, the latter argues that it is just a random walk.

Drawbacks related to this theory

As one would argue, how do these same money managers end up making millions and billions based on their actuarial skills if this theory exists?

Yes, the theory has its fare share of criticism.

The simple argument that can be put up against it is that price of a security has various factors affecting it,most of which can be looked upon. ( demand, parent company,etc.)

Secondly,stock prices do follow certain trends, just because the future can’t be known, doesn’t mean the past trends of the security wont be affecting it.

All in all, it sums up to be just a theory, and not a proven method. It is based on the preferences of each investor,whether she/ he thinks that stock market is somewhat predictable or not.