Fact Check: Why Is Beating The Market So Hard?

Anyone who’s ever tried to beat the market over a sustained period of time probably grimaced on reading the above title. They’ll know from experience what a daunting task it is. Research shows that only about 1% of active traders actually manage to outperform the most popular reference index—the .

In 2007, Warren Buffett famously bet a million dollars that a Vanguard S&P 500 index fund would outshine a basket of hedge funds over a time period of 10 years.

S&P 500 vs. hedge fund returns since 2011

Buffett won that bet easily, as the S&P 500 returned a net 7.1% annually, compared to just a net 2.2% for the hedge funds. This begs the question, why is beating the market so hard?

The Efficient Market Hypothesis

Dubbed ‘EMH’, this investment theory claims that as the market reflects all currently known information, consistently beating the market is impossible. According to this premise, there are no undervalued or overvalued assets; everything is priced exactly as it should be. As a result, there’s no space or opportunity to generate extra returns.

Still, some have managed to consistently identify lucrative investment opportunities, so perhaps the reality is that while the market is efficient to a certain extent, it isn’t flawless. By and large the market prices things correctly, but it does make the odd mistake here and there. And it’s these mistakes that could potentially open the door for generating alpha.

However, this isn’t where the difficulty ends.

Even If An Edge Exists…

To beat the market, you have to act differently than other market participants. In the past, one way of doing this was to notice a piece of actionable information missed by the rest. But this was in the days before Information was freely distributed and at a

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