If markets generate accurate price information when close to equilibrium, what is the prerequisite for efficiency? It is the flow of information. As long as the information being processed by the market is information about the market (in other words, the balance between buyers and sellers and the prices they bid and ask), the market will act to maintain the equilibrium by adjusting the price. When exogenous information enters the market, whether the elimination of part of the demand for a commodity, supply disruption such as an unexpected freeze of the Florida orange crop, a change in the prospects for a company's earnings such as that caused by a disaster at one of the company's plants, or the launching of a takeover bid at a premium, the market's equilibrium is disturbed and the market will move chaotically and discontinuously until it finds equilibrium again.
Whenever a market is using incomplete or inaccurate information to arrive at its valuations, the prices it assigns cannot be relied upon as valid. The large shifts in the valuation of industry groups through time may be seen as the market reacting as it obtains and digests information regarding the events and realities of those industries, which may not be visible in the financial aggregates they report.
We have seen how arbitrary is the process of classifying a company within an ``industry group'' and how capricious the market can be in valuing these groups. To the extent that the market recognises New Technological Corporations at all, it lumps them with ``high tech'' and values their earnings within that sector. This aggregation may be incorrect. The great majority of ``high-technology'' companies are capital-intensive businesses in the producer non-durables sector, characterised by short product cycles, heavy research and development investment, rapid obsolescence of capital equipment, and rapid erosion of margins in a highly competitive market. One can dispute the validity of every single one of these assertions for a New Technological Corporation. This suggests that the market will eventually discover that the ``shape'' of a New Technological Corporation is not only very different from what it considers ``high-tech'' but is, in fact, virtually unique among companies. As this realisation dawns and its implications for the long-term earnings prospects of the group are worked out, the market can be expected to re-value the stocks of New Technological Corporations based upon their fundamentals. The properties of such businesses suggest that the revaluation will be substantial and upward.
Editor: John Walker