Question

As you flip through The Wall Street Journal you notice advertisements by investment firms wanting to sell you their products. Common among all of the ads is the claim that the firm has a track record of performing above average. Explain how they can all be above average. I mean, it seems like ALL of these firms have "beat the Market!" Is this inconsistent with the efficient markets theory?

Answer 1

The Efficient Market Hypothesis essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities.In an efficient market, prices reflect all available information, and so past prices can tell you nothing useful about whether future prices will go up or down.

In Wall Street Journal you notice advertisements by investment firms wanting to sell you their products, They basically wants to show you the best of their performances but tries to hide out the negatives but you will have to find the same if you try to invest in some securities and be a rational investor.

While claiming that the firm has a track record of performing above average, One will also have to be factor in about the survival factor because past performance is no guarantee for future returns And in my personal opinion all those firms who are trying to sell themselves on the basis that they outperform the benchmark are often bull market babies but in the situation of economic downturn ,they often go for the toss as they have very high exposure in the high beta stocks.

No, this is not consistent with efficient markets theory as efficient market is traditional theory and market doesnot always perform in accordance with such theories.