Investors take the company over, discipline wayward managers, and get rid of inefficient operations. This suggests that managers had not been doing all they could to make shareholders well off. In the 1980s, junk bonds were used to finance many takeovers. Junk bonds have a bad name in the media, but they allowed investors to buy badly managed companies and restore efficiency. Chapter 4 explains that stock markets are like laboratories where new ideas get tried out.
Stocks are experiments in the creation of wealth.
Investors are like scientists who put money behind experiments they think will succeed. This constant assessment of where the best opportunities lie means that every new scrap of information about a company's fortunes is quickly reflected in the price of the stock. This is known as stock market efficiency. Efficiency is important because it means that resources are being put to their best use. For example, news that the TB bacillus is getting stronger should signal investors to put resources behind biomedical companies with a chance of developing a drug against the bacillus.