Ultimately, can the market be beat?

And if someone can beat the market, how do you find the people you entrust your money to. I think it is John Bogle, the founder of Vanguard, who liked to talk about a coin flipping competition. If you have thousands of people who are all flipping coins, statistically, you will find people who have amazing streaks. If someone flipped a coin that landed heads thirty times straight, we might then assume that that person has a great aptitude for flipping coins. But we know that in coin flipping, this is a completely random chance of happening, and will happen if there are enough instances of flipping. 

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But when it comes to stock picking, we move from the idea that the stock was picked at random and instead had a group of skilled analysts behind it. Then we start to build a narrative and say that we can look at the history of some “Firm X” and then judge if their return less fees beats a benchmark consistently. If so, maybe we can say they have their skills and I should trust them with my money. The thing is, there is always that disclaimer that past performance is not indicative of future success, so even if they are good stock pickers (coin flippers) their run might end. If the market is truly random, it will end.

I think that the financial research shows that there are factors that are often undervalued, and for times, investing in these factors – momentum, company size, P/E ratios, etc. – can have a return that is greater than the overall market. The problem is that these factors are not everywhere and always relevant. Sometimes they are in effect and you can make money above the market, and sometimes you can lose relative to an index. I’m skeptical that anyone can beat the market consistently, but I don’t think it is truly efficient (so if you see a hundred-dollar bill on the ground, it makes sense to pick it up). I’m not sure the discipline is convinced on if the EMH exists and if it does just how strong it is, to the point that Thaler and Fama won their Nobles in the same year when they were largely notable for having competing theories of how markets work. For me, I think it is somewhat efficient, but I personally don’t have the skills or time to spend on watching the day to day movements of financial markets, so I do have my retirement in broad-based index funds with low fees.