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Can You Beat the Market?

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From YouTube (Approved: teresahopson), produced by Marginal Revolution University
 
On average, even professional money managers don’t beat the market. To show you why, here’s a scenario to consider:

Say we advise you to invest in companies serving the aging U.S. population. Since the percentage of elderly will rise over the coming decades, it makes sense to invest now in products and services that the elderly might need. Sounds logical, right? Wrong. 

See, the aging of the US population isn’t a secret. It’s public information. Now, say you acted on the information and did buy stock as we advised. The current price of that stock already reflects information known to the market. Thus, it’s hard to systematically outperform the market, given that everyone else tends to have the same information you do. This is also the main idea behind the efficient market hypothesis. 

According to the efficient market hypothesis, the prices of traded assets already reflect all publicly available information. 

With information available to buyers and sellers alike, no one has any sustainable advantage over anyone else. This is why even the pros tend not to beat the market. And that aside, even if news did pop up to change the price of an asset, it would be at random and would likely be reflected in the asset price almost immediately. So there’s no reliable way to forecast performance. 

As proof of that, take the Challenger space shuttle crash of January 28, 1986. Within minutes of the crash, the news hit the Dow Jones wire service. The stock prices of the major contractors who helped build the shuttle fell immediately. Keep in mind: that was in the 80s. At today’s pace, new information can change stock prices within seconds. This is why stock tips often end up obsolete. So to sum up—it’s hard to beat the market. You have to accept that. (06:07)
 
Ages: 18 - 18 License: Educational Community License Owner: Marginal Revolution University Found by MRUniversity
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