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Efficient Markets and Norovirus

Sigma Investment Counselors

February 13, 2014

In finance, the efficient market hypothesis asserts that financial markets are “informationally efficient” and reflect the available information.

Sometimes it is difficult to completely discern what the markets actually know. Consider the cruise industry and Norovirus.

Norovirus is a very contagious virus, it is the most common cause of acute gastroenteritis in the U. S. and causes approximately 19-21 million illnesses a year. World wide, the virus affects approximately 267 million people each year.

Over the last several years, the public has become increasingly aware of this virus, due primarily to the high levels of publicity surrounding well documented outbreaks on cruise ships.

Actually, the cruise industry accounts for a very small percentage of cases of Norovirus as documented by the Centers for Disease Control and Prevention(CDC). However, the cruise industry is required to report significant outbreaks to the CDC and stories about sick people on vacation makes good copy.

Norovirus tends to be most prevalent in a variety of locations, such as nursing homes, hospitals, hotels, resorts and other sites, where large groups of people remain in close contact with each other.

While the cruise industry accounts for a small percentage of the outbreaks, it seems to be getting the majority of press coverage. A notable exception is the recent announcement that a historic New York state resort has decided to shut down for a week, for an extensive sanitation, after an outbreak of Norovirus infected staff and guests.

That people get sick on cruise ships is well known. Less clear is the extent to which the cruise industry is more or less vulnerable than other vacation destinations. Is the highly publicized risk, perhaps relatively small, of contracting an unpleasant, flu-like illness a deterrent to booking a cruise? Will the industry have to provide special pricing or other inducements?

The above is indicative of some of the complications facing investors when trying to determine how much is “already in the price” of a prospective investment.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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