Can You Beat the Market?

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 US 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.

Still, how should you invest? That’s what we’ll discuss in the next video.

Help us caption & translate this video!

[GoneZombie]

Of course, markets aren't perfectly efficient, and they do make mistakes. Nintendo's stock price adventures following the release of Pokemon Go is an interesting recent example.

[philip]

I just wanted to point out that technically there are sure ways to beat the market if you have access to large amounts of data that the average investor doesnt have access to. One example could be insider trading (like from the show "billions" which is a real thing that really happens). However, another (legal) example could be using big data. There are companies who use very powerful computers to analyze tons of data, everything from flight delays, traffic patters, weather forecasts, news outlets, google searches, people's social media accounts, and a lot of economic predictors and use powerful algorithms that process this data and find correlations and patterns in the market which they exploit to make money. It is mathematically possible to beat the market this way because most people in the market wont have access to such large data sets and wont be able to exploit these anomalies. This is how jim simmons made his money.

[tarkmert]

What a beneficial example you gave on "Morton-Thiokol"! Your works are appreciated.

[am]

What role do financial engineers which have come up in recent decades play in this? I mean I never understand what they say except that they use a lot of statistics and modelling.

[olgringold]

Everyone pricing known information in the market has different time horizons. In other words, everyone discounts future cash flows to present value, but with their own subjective discount rate, based on their own investing time horizon.

[h.a.s.]

Buffett and Munger disagree with this theory. Some say, oh, they have more information than others. When they first started, they did not have this information, and they still beat the market. The market is irrational because people do not always behave rationally.

[AMITSHARMA-qjzf]

plz make a video on types of tax and tax rates in india

[billwalton]

Iv left the market in the dust, im baffled with this adage. Its an ego boost to me if the rest of the world really cant beat the market, i absolutely destroy it.

[Trx]

can you talk about currencys when you can. and the currency crash people are predicting and why

[nwgverified]

The markets are not efficient. Some markets are highly ineffecient. Some are highly efficient

[studmalexy]

in other words, , shouldn't we go for dividends?

[juwright]

Access to INFORMATION does not equal effective or correct use of information. EMH assumes that every market participant has the same abilities or desire to use the available information.

[platoscavealum]

Warren Buffett & Charlie Munger on the "Efficient Market Theory"

[fufu]

Bit by bit, I shall finish these videos! That is my goal, all of the videos, eventually. (I started at latest and am here)

[TheNextBigRush]

Love the video! There are 2 ways to beat the market by a long shot. 1- learn the skills of day trading. Very hard and it takes time and patience. Or 2- Get into resource investing and buy he stocks when the commodities are at least at a 3-5 year low. The second strategy takes guts, but I've made over 300% on my money doing that this year.

[crazieeez]

Well the efficient market theory has been demoted to efficient market hypothesis. Had one invested in Facebook 5 years ago, its return is higher than the average market. Had one give all her money to Berthshire Hathway 10 years ago, one would have return higher than the market.

Efficient market hypothesis is taking what physicists have produced and trying to find examples to justify because it is like the word "blockchain". You cannot go wrong if you ride the buzz word of the time or the theory of the time.

[Khadangasantos]

Well buffet hasn't beaten the s&p 500 in last 10 years, & he himself advices buy index fund...

[zes]

wrong, no such thing as predicx power about marketx, that was a fluke from earlier previous reports, also, no such thing as interesx or not

[nafijulislamsaral]

What percent of these experts would successfully predict the market’s direction at least 2 out of the 3 years by simply flipping a coin?

[tixchicken]

The market is irrational and highly emotional look at GME or AMC