In 9 Tweets, Marc Andreessen Explains How Bubbles Happen

The efficient markets hypothesis (EMH) is one of the more controversial theories on how the financial markets work.

Popularized by Nobel-prize winning economist Eugene Fama, the EMH basically argues that all available information at any given time is priced into the market. And therefore, it's almost impossible to try to invest in a way to beat the market.

Folks like Vanguard's Jack Bogle and Nobel-prize winning economist Robert Shiller disagree with the EMH because it essentially denies the existence of asset bubbles.

With high-priced momentum stocks like Twitter and Groupon crashing lately, people are once again suggesting that we are seeing a failure of the EMH.

To that, famed venture capitalist Marc Andreessen offers a couple of Tweets.

Andreessen explains that the current price of a company is often factored into the valuation model for that company. And as George Soros' theory of reflexivity posits, you basically get a feedback loop that can cause prices to keep going in one direction or another.

Because of this relationship, "prices drive the creation of theories" that explain the moves.

"Therefore a boom in theories of how everything's a bubble and certain to crash is evidence of a cyclical bottom, not a cyclical top," he says. "Therefore Efficient Market Hypothesis is correct if for "all information" you substitute "all information, theories, noise, and bullsh*t"."

With that conclusion, Andreessen is more or less bridging the gap between Fama and Shiller.

Here are all of Andreessen's tweets.

1/Conventional view of how to value companies: (1) Analyze company + its financials + future cash flows; (2) Calculate correct valuation.

- Marc Andreessen (@pmarca) May 7, 2014

2/What actually happens: (1) Observe current market valuation; (2) Construct theory and model to explain that valuation.

- Marc Andreessen (@pmarca) May 7, 2014

3/In this way, George Soros's theory of reflexivity is exactly correct. http://t.co/iX3cWkmZP0

- Marc Andreessen (@pmarca) May 7, 2014

4/Fundamentals influence prices which influence fundamentals which influence prices which influence fundamentals... ad infinitum.

- Marc Andreessen (@pmarca) May 7, 2014

5/At cyclical top, high prices drive creation of theories to explain infinite future glory; negative investors & analysts get fired.

- Marc Andreessen (@pmarca) May 7, 2014

6/At cyclical bottom, low prices drive creation of theories to explain permanent future misery; positive investors & analysts get fired.

- Marc Andreessen (@pmarca) May 7, 2014

7/Therefore a boom in theories of how everything's a bubble and certain to crash is evidence of a cyclical bottom, not a cyclical top.

- Marc Andreessen (@pmarca) May 7, 2014

8/Therefore Efficient Market Hypothesis is correct if for "all information" you substitute "all information, theories, noise, and bullsh*t".

- Marc Andreessen (@pmarca) May 7, 2014

9/Since we are social animals, the challenge of actually standing outside of herd is brutally hard. Pressure to conform is constant/intense.

- Marc Andreessen (@pmarca) May 7, 2014

Disclosure: Marc Andreessen is an investor in Business Insider.