It’s Already Baked In

“I take the market-efficiency hypothesis to be the simple statement that security prices fully reflect all available information.” –Eugene Fama

03-08-2021

Fama won a Nobel Prize in Economics for his work regarding the efficiency of the markets. What this means is that the global stock markets have priced in all available information and expectations. Current prices are the best approximation of fair value. Price changes are due to unforeseen events. Fama’s research was groundbreaking for me. It resonated with me right away. Something in my gut told me this was right. When I delved into the research more deeply it blew me away. The logic was unshakable and the compelling evidence was overwhelming. It has changed the way I will invest forever.

The proof is in the pudding. The vast majority of active fund managers cannot beat their respective benchmarks in any given year. The results get even worse when you look out over 5, 10, 20 years and beyond. The simple truth is that active management strategies cannot consistently add value through security selection and market timing. The primary reason is because the markets are efficient and can’t be beat on any consistent basis.

This is precisely why we don’t try to beat the market. We essentially own the benchmarks that the active managers can’t beat and get the generous global capital market rates of return that the markets provide.

Keep in mind… by the time you hear about or read about it’s already been baked into the price. If nothing else, the market is a very efficient forward looking information processing machine.

Check out a recent article by Ken Fisher where he weighs in on the efficient markets. How to Know What Everyone Else Is Sweating, So That You Don’t Have To