What is the Real Secret to Market-Beating Returns?
In my last four columns, we’ve discussed whether luck or skill – or some combination of the two – is the primary determinant of economic success.
Today, we address this question to the stock market. Is investor success there a matter of luck or skill?
For noninvestors and those with very little experience, the answer is easy. It’s luck.
Novices say this because they view the stock market as a gigantic casino, where stocks gyrate madly up and down for little or no reason at all.
And you know what? In the short term, they’re right.
There is no direct correlation from hour to hour or day to day between a company’s share price performance and its profit growth. That’s why day trading is an utter waste of time.
As the great value investor Benjamin Graham famously said, in the short-term the market is a voting machine. In the long term, it’s a
weighing machine. And what it weighs is earnings.
I challenge you to go back through history and find even a single company that increased its earnings quarter after quarter, year after
year, and the stock didn’t tag along. It doesn’t happen. Share prices follow earnings.
However, some highly knowledgeable people – including most academics – also insist that investment outperformance is a matter of luck,
but for an entirely different reason.
They subscribe to the so-called “efficient market hypothesis.” This is the theory that rational, self-interested investors take every bit of
material and public information and immediately incorporate it into share prices.
Read more at Investment U