Efficient Markets
It’s surprising to think that people think that the markets are efficient. After all the bubbles and crashes, all the fortunes won and lost, people still think one security is as good as the next.
If markets are efficient, then there should be no excess returns. That is, after adjusting for risk, every stock should have the same expected return. The problem is, they don’t.
Usually, people try to disprove this theory by finding people who beat the market. While those people can be found, it is more instructive to look at the ones that fail. If markets were efficient people should get the same risk-adjusted return before transaction costs and taxes. However, that’s not what we see.
People have a tendency to buy high and sell low. The returns people earn on their investments often trail the return they would earn by not trying to time the market by even more than transaction costs would suggest.
