Investors are constantly confronted by advertisements and promotions telling them that they can “beat” the market. Beating the market is always a “seductive” pitch because basically it’s an offer of free money — the idea that without any extra effort or knowledge on the investor’s part they can get returns on their money that are superior to everyone else’s.
Earlier this month, famed hedge fund manager Cliff Asness and John Liew wrote a great, long article for Institutional Investor about the Efficient Market Hypothesis, and whether markets were in fact beatable. The article was framed around this year’s economics Nobel Prize winners Robert Shiller (who is famous for writing about bubbles and irrationality in markets) and Eugene Fama (who is the father of the Efficient Market Hypothesis). Asness and Liew find a way to reconcile the two approaches, which at first blush might seem to be polar opposites.
One paragraph from the piece really stands out. It pertains to mathematician and hedge fund manager Jim Simons whose fund Renaissance Technologies is renowned for its extraordinarily high returns over years and years of trading:
That’s not to say we think [beating the market is] impossible. Take, for instance, our favourite example, briefly mentioned earlier, of people who seem to be able to consistently beat the market: Renaissance Technologies. It’s really hard to reconcile their results long-term with market efficiency (and any reasonable equilibrium model). But here’s how it’s still pretty efficient to us: We’re not allowed to invest with them (don’t gloat; you’re not either). They invest only their own money. In fact, in our years of managing money, it seems like whenever we have found instances of individuals or firms that seem to have something so special (you never really know for sure, of course), the more certain we are that they are on to something, the more likely it is that either they are not taking money or they take out so much in either compensation or fees that investors are left with what seems like a pretty normal expected rate of return. (Any abnormally wonderful rate of return for risk can be rendered normal or worse with a sufficiently high fee.)
Yes, consistently walloping the market can be done. But the people who can do that aren’t interested in your money.
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