Hard To Time Outperformance
The efficient market hypothesis asserts that financial markets are “informationally efficient”; that is, investors shouldn’t expect to consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. However, we know that the market isn’t perfectly efficient.
In fact, as I explained in my Seeking Alpha series on the subject, it doesn’t hold for any of the three forms of market efficiency: strong; semi-strong; or weak. However, there’s a large body of evidence demonstrating it succeeds in the only way that really matters: There are fewer active managers that outperform appropriate risk-adjusted benchmarks, after expenses, than would be randomly expected. In addition, there’s little to no evidence of persistence of performance beyond the randomly expected.
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