So, you think you can beat the market? A friend of mine (HT: John B) sends me the following chart:

What is this chart telling us? It is a reminder that current market prices tend to capture any relevant and publicly relevant information about a product, company, sector, or industry. This is the simple foundation for the “Efficient Markets Hypothesis.” What are its implications? Well, it would suggest that an investor, by looking at business cycle conditions, and other publicly available information, cannot profit from that information by trading based on it.

Does that mean investors cannot beat the market? Not at all. But do not confuse luck with competence. Perhaps I’ll put some charts up in the future to illustrate the difference. The chart above compares the performance of actively managed funds versus investment funds that are not actively managed (i.e. they are indexed to “mimic” the market. The chart looks specifically at how market “timers” fared during business downturns (the argument being that active investors can get out while the market is timing, hold onto their cash, and then get back in when the market turns around; index funds ride the wave all the way down and then back up). You can see from the left hand column that in all but one asset class, over half of the actively managed funds were outperformed by their relevant benchmarks. In fact, an unweighted average shows that 70 percent of actively managed funds did worse than their benchmarks last year. The column on the right shows the same information for the prior market downturn (2000-2002). The results are similar – in all but two asset classes did index funds outperform managed funds more than half the time. The unweighted average was that 60 percent of actively managed funds performed worse then their relevant index benchmarks.

Yes, you can beat the market – but the same is true of the blackjack table. Having a good day (or week) at the table does not mean you can earn a living playing 21 – as people who choose to do that will soon enough find themselves poorer than they needed to be (of course, I am discounting by infinity the satisfaction people get from playing the market – in fact, that satisfaction is important, and is another reason I have to worry less when I make my investment decisions).