Markets are Efficient

We’ve looked at the value of Active Fund Managers v’s the Market, but what about the Markets themselves?  Our core belief is that markets are “efficient” or rather sufficiently efficient, meaning that prices reflect the knowledge and expectations of all investors. Though prices are not always correct, the availability of information and its rapid dissemination means that markets are so competitive that it is highly unlikely that any single investor can routinely profit at the expense of all other investors.

Many investment managers believe that they can actively exploit market miss-pricings by stock-picking or market-timing – the traditional activities of active fund management. If markets were not efficient then the brightest, hardest-working and most highly paid fund managers would be able to beat a simple buy-and-hold strategy over time.

But nearly forty years of academic research has shown that traditional investment managers are unable to outperform markets by anything more that the amount we would expect by chance. Indeed a multitude of studies has reached the same general conclusion: the average actively managed fund does no better than the market after fees, transaction costs and taxes.

Before fees, the track records of traditional fund managers are similar to what would be expected from a room full of orang-utans throwing darts at share and bond listings. After fees, the expected distribution of results is better for the orang-utans because they are assumed to work for bananas.

David Booth “Index & Enhanced Index Funds”, 2001

Over the long run, markets reward investors for taking risk and providing capital. If they did not, the capitalist system would have collapsed long ago. Indeed, the only people who still appear to believe to the contrary are the governments of Cuba and North Korea – and Active Fund Managers.