Why it is hard to "beat" the stockmarket

In my twenty years in financial services I have heard more times than I can count the ”holy grail” of beating the stock market.

It is clear why we would want this, as if we pay a fund manager to buy companies who perform better than the overall market, we make more money.

Unfortunately, despite the huge marketing campaigns used to convince us otherwise, the evidence we have seen is that many fund managers are unable to achieve this consistently over time, after costs (try looking at https://us.spindices.com/spiva/#/reports for a graphical example).

However, if these fund managers have large research teams and plenty of data, why is this?

There are a few potential reasons with one being that markets are “efficient”.

What does this mean?

The concept is that whatever price is quoted for a company on the stock market is a fair price as the price is the collective opinion of the millions of buyers and sellers.

A closer-to-home example would be eBay. Have you ever had the experience of bidding on an item that looked a real bargain at the quoted price?

As the auction progresses more and more bids are made, often with a flurry at the end. The result from my experience is that the eventual sale price is probably what the item is worth and so has sold for fair value. So, like stock markets, the collective opinions of all the eBay buyers drives the price to a perceived fair value. No one can say if it is the “right” price as only the future will reveal this.

Another example would be your home. If one Estate Agent valued it you would get one figure, but what if you obtained three, five, ten or even twenty valuations? The more opinions you get the more likely the average of these will represent fair value.

Therefore, if your investments are managed in a way where “beating” the market is the aim, remember you or your fund manager are competing against the collective wisdom of the other millions and millions and millions of buyers and sellers. Do you or the fund manager know more than them?

Warm regards

Neil Rossiter

This article should not be considered investment advice or an offer of any product for sale, it contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular, strategy or investment product. Information contained has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not an indicator of future results.

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