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- Efficient Markets
- Efficient market theory says the current price of any stock is
its right price as it reflects all public information
about that stock and the economy in general.
- Future price movements are effectively a random walk
of Burton G Malkiel, author of the classic A
Random Walk Down Wall Street.
- The financial sector is extremely efficient with many highly skilled
analysts scrutinizing companies and the economy with fine tooth
- Any mis-priced stocks would quickly be arbitraged back to their
- Thus it is impossible to consistently beat the market.
- how come markets sometimes undergo sudden corrections (crashes)?
- how come some individual investors, eg Warrrn Buffet, do beat
markets - sometimes spectacularly?
can & do occur, but are difficult to exploit.
- In practice fund managers don't beat markets. In fact, managed
funds tend to underperform once fees are
deducted. For example:
- "Research from independent advisers Bestinvest shows
that over the past three years 73pc of actively managed funds
nvesting in UK companies to increase your capital have failed
to beat the FTSE All Share Index." (Daily Mail (Oct 25,
- Clive Briault of The United Kingdom Financial Services Authority
says: " Our research shows there is no evidence, on average,
over time, that actively managed funds outperform tracker
funds if you take into account the difference in charges between
the two." (The Mail on Sunday, Financial Mail, January
- Corollary: Managed funds are bad for your wealth!
- If efficient market (or random walk) theory is right, and the
evidence suggests it is, you (or expensive fund managers) can't
beat the markets
so it's best to simply put your money into low-cost tracker funds
(those which simply track an index rather than actively try to beat
it) and leaving it there for some time.
- Of course you can still supplement core tracker holdings by following
your personal hunches and backing individual sectors - or stocks.
Maybe you'll be right!