Eugene Fama, a professor at the University of Chicago, founder of the efficient market hypothesis, and 2013 Nobel Prize winner in Economic Sciences, is widely recognized in academia as the foremost authority on how market prices are formed.
He and his collaborator Kenneth French conducted a famous study comparing the long-term performance of thousands of fund managers against statistical benchmarks, seeking to distinguish whose results came from genuine skill and whose were merely luck.
The harsh conclusion lies in the threshold: even by the most lenient standards, only a tiny proportion of managers could be statistically confirmed to possess genuine skill—and they were extremely difficult to identify in advance.
You cannot know ahead of time whether the “master” in front of you is one of those rare few or simply someone who has had a lucky streak.
Fama’s research did not claim that “nobody can win.” What it dismantled was something more fundamental: the feasibility of “picking.” A few truly skilled managers may indeed exist, but you cannot tell who will win in advance. By the time you have enough historical data to verify their skill, your money has already been bet on the outcome.
So for ordinary investors, the right takeaway is not “there are no skilled managers in the world,” but “even if they exist, you won’t be able to pick them in advance.”
Since picking is inevitably a blind bet, the most rational response is to stop trying to pick and simply take the market average, which depends on no one in particular.
He and his collaborator Kenneth French conducted a famous study comparing the long-term performance of thousands of fund managers against statistical benchmarks, seeking to distinguish whose results came from genuine skill and whose were merely luck.
The harsh conclusion lies in the threshold: even by the most lenient standards, only a tiny proportion of managers could be statistically confirmed to possess genuine skill—and they were extremely difficult to identify in advance.
You cannot know ahead of time whether the “master” in front of you is one of those rare few or simply someone who has had a lucky streak.
Fama’s research did not claim that “nobody can win.” What it dismantled was something more fundamental: the feasibility of “picking.” A few truly skilled managers may indeed exist, but you cannot tell who will win in advance. By the time you have enough historical data to verify their skill, your money has already been bet on the outcome.
So for ordinary investors, the right takeaway is not “there are no skilled managers in the world,” but “even if they exist, you won’t be able to pick them in advance.”
Since picking is inevitably a blind bet, the most rational response is to stop trying to pick and simply take the market average, which depends on no one in particular.