Final answer:
Belief in the strong form of the EMH implies that all available information, including insider information, is already reflected in stock prices. Consequently, predicting stock performance is more about recognizing shifts in market expectations rather than actual future profits, as analysts and investors continually perform this research.
Step-by-step explanation:
If you believe in the strong form of the Efficient Market Hypothesis (EMH), you believe that stock prices reflect all available information, including information that is available only to insiders. The EMH proposes that stocks always trade at their fair value on stock exchanges, which means that it is impossible to consistently outperform the market through expert stock selection or market timing. The strong form suggests that even inside information is factored into the stock price; hence, even insider trading cannot provide an advantage.
The idea that stock prices are based on expectations about the future has a powerful implication. Expectations determine stock price, and thus, shifts in expectations will determine shifts in the stock price. What matters for predicting whether the stock price of a company will do well is not necessarily whether the company will actually earn profits in the future. Instead, one should look for a company that analysts believe has poor prospects currently, but is expected to outperform in the future.
As a firm becomes more established and its strategy appears likely to lead to profits, the need for knowing the individual managers and their business plans personally becomes less significant because information about the company's products, revenues, costs, and profits has become more widely available to investors like bondholders and shareholders who provide financial capital to the firm.