There's quite a bit of evidence that even professionals don't show any ability to pick stocks or to predict market rollbacks. Most of the people we identify as skilled based on returns have probably just been lucky.
Interpretation
Even experts often lack the ability to predict market trends and may succeed due to chance rather than skill.
Eugene Fama's quote suggests that the stock market is highly unpredictable, and even seasoned professionals struggle to demonstrate consistent skill in picking winning stocks. He implies that the apparent success of those identified as skilled investors might be more attributable to luck than to a genuine understanding of the market's complexities.
In practice
This quote is perfect for a financial seminar discussing the unpredictability of investments.
The problem that people don't understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they're not really active. They have to make bets. What that means is there's a huge dispersion of outcomes that are totally consistent with just chance. There's no skill involved it. It's just good luck or bad luck.
After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse.
Market timing doesn't work. If all the bubbles and all this mispricing really exist, how come so few people see it before it turns out that way?
Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
It seems to me - particularly for these retirement-plan investors, the vast majority of whom are not particularly financially sophisticated - by far the best way is to invest in index funds.
Everybody thinks that they're going to time the market, they're going to sharpshoot the market, and buy right at the bottom. The truth of the matter is that nobody is good at it.
There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do.
When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns - in short, being fooled by randomness.
Investing is a virtuous habit best started as early as possible.
Subscribe for the occasional hand-picked quote. No noise.