There are plenty of professional investors who have beaten the market year after year, and by a lot more than single digit percentages. Multi-decade returns of 20% and above are well documented. I personally invested in a fund 12 years ago which has returned a compound 21% pa return over that period, so I know that they definitely exist. The chance of this happening due to luck is impossibly low.
Some professionals have an edge by developing a model of the market that suits their particular risk levels/cognitive model. As long as that edge continues to work, they continue to outperform by large amounts. The edge might be extraordinary discipline, it might be a allocation size model, it might be a risk-management model. The edge has to exist, and most importantly, it has to match the psychological profile of the individual.
The mistake is not that the EMT is particularly true, it is that amateurs approach the markets with the hope of replicating the results of the professionals, and that amateurs think they have an edge, but they in reality do not.
If the Efficient Markets Theory is to hold true, then in no case should people have multi-year returns well in excess of average. Since this is true, then most people will say that the theory is false. I don't really have a dog in the fight- I don't care either way. But I don't think you can say that it is chance that causes people outperform the market, because there is far too much evidence to the contrary.
As for the 'people studied for years' bit - I don't think that strengthens any argument. The research world is littered with theories that have failed, and length of time spent researching has little correlation with factual correctness. Ultimately, more theories have to fail than succeed in order for knowledge to be gained.
>There are plenty of professional investors who have beaten the market year after year, and by a lot more than single digit percentages. Multi-decade returns of 20% and above are well documented. I personally invested in a fund 12 years ago which has returned a compound 21% pa return over that period, so I know that they definitely exist.
>The chance of this happening due to luck is impossibly low.
The chance of this happening by chance to some investors (though not particular investors) in a sufficiently large group of investors will approach 100%. Also, depending on the density of the relationships between investors and the amount of attention they get for their returns, the odds of one of those investors being within a friend of a friend of yours will also approach 100%.
The existence of runs is not evidence against randomness.
"Multi-decade returns of 20% and above are well documented."
The few that exist might be documented (but please enlighten us on where), but if they are, it's most likely because they are so rare.
"I personally invested in a fund 12 years ago which has returned a compound 21% pa return over that period, so I know that they definitely exist."
That's exactly what the GP says - of course there are, but how do you which ones will be, and know you didn't stumble into this one by chance? Your story might just be survivor bias. When I look at the funds my banks offer, there are some that offer 10%+ returns for the last years. Thing is though that they offer dozens of funds, all of which look equally likely in their prospects. How do I know which one to pick? Their yields are normally distributed, just as one would expect.
No, you're getting it confused. For a start, the fund that I bought into advertised exactly what they expected (it is based on a computerised trading model, so they know what to expect if it worked). It is not 'chance' that I happened onto a fund - what we are talking about is random chance that anyone can have consistent above-market returns. Certainly it is possible for any one individual to have a chance occurence of a high return one year- the EMT would say that next year the chance is for a loss. When people or firms put together year on year of consistent returns above market, that is no longer chance.
there are a lot of investment funds out there. even if none possess any skill, it is possible for a few to produce extreme risk-adjusted performance simply by chance.
- One individual or fund doing well in any particular year = random chance
- One individual or fund doing well for a decade = chance is not a possible explanation
Essentially the chance of getting a heads on a coin flip is a 50/50. If you get heads, it's a chance event.
However, if you do 10,000 coin flips and end up with 8,000 heads, either the flipper or the coin have an edge in making heads turn up. The pattern shows that it is no longer a random 50:50 chance.
If a fund has 50% random chance of doing well in a particular year, then 1 of 1000 funds will do well for a whole decade purely from chance. There are thousands of funds, so existance of funds with 10/10 good years should expected even if they are purely random.
No, you are not getting the point. When you do millions of 10000 coin flips, the chance that one of them will be 8000 heads is not 50:50. Look up 'birthday paradox'.
Exactly, let's not extend the conclusions of the article: it's not that it's impossible to consistently beat the market average, it's just that it's extremely unlikely for the "general public".
EMT is probably approximately true, specially with fast algorithmic trading and automated analysis. But the degree of accuracy is key -- some applications are highly sensitive to how good this approximation is, allowing big gains. Also, in practice, there is a "zero sum" part of trading, and that necessarily implies that someone is going to make money and someone will loose (disregarding the other part). Whoever has the best model wins consistently.
I'm surprised anyone would think that 20% returns are over the top - outsized returns in markets are hardly an industry secret. Triple digit returns are not unheard of. Most of the people making big money don't exactly advertise and some are downright reclusive. But they certainly do exist.
I recommend reading http://www.amazon.com/The-New-Market-Wizards-Conversations/d... and the other versions in the series - I think there is 4 now. These are candid interviews with the individuals involved. They are good reading just for the interested entrepreneur.
Some professionals have an edge by developing a model of the market that suits their particular risk levels/cognitive model. As long as that edge continues to work, they continue to outperform by large amounts. The edge might be extraordinary discipline, it might be a allocation size model, it might be a risk-management model. The edge has to exist, and most importantly, it has to match the psychological profile of the individual.
The mistake is not that the EMT is particularly true, it is that amateurs approach the markets with the hope of replicating the results of the professionals, and that amateurs think they have an edge, but they in reality do not.
If the Efficient Markets Theory is to hold true, then in no case should people have multi-year returns well in excess of average. Since this is true, then most people will say that the theory is false. I don't really have a dog in the fight- I don't care either way. But I don't think you can say that it is chance that causes people outperform the market, because there is far too much evidence to the contrary.
As for the 'people studied for years' bit - I don't think that strengthens any argument. The research world is littered with theories that have failed, and length of time spent researching has little correlation with factual correctness. Ultimately, more theories have to fail than succeed in order for knowledge to be gained.