always an interesting question and one I don’t think most investors ask enough.

reminds me of my old ball coach who used to tell us “the harder you work, the luckier you get”

Some lines of wisdom/insight I saw in the paper (there were lots)

“In the aggregate, institutional money tends to flow to assets that have done well and fails to consider sufficiently the role of luck.” page 2

“One point is worth making right upfront: the outcomes of any activity that combine skill and luck will exhibit reversion to the mean” page 3

“Outcomes that are highly persistent over time tend to be shaped more by skill than luck”
page 4

“Probably the single biggest challenge in assessing the relative contribution of skill and luck is that in most cases we can only observe outcomes.” page 6

“But the research also shows that only a small subset of the investing population is skillful, and that the percentage of funds that are skillful is declining.” page 16

“Corporate performance also shows reversion to the mean. This phenomenon has been well documented for decades.43 For a company, skill is equivalent to competitive advantage, which confers an ability to generate returns on capital in excess of the cost of capital. Companies, like athletes, tend to follow a lifecycle. A company typically sees its skill diminish as the industry matures, as all competitors move toward optimal efficiency, and as prices are set so that they squeeze out excess profits. Competitive advantage is closely linked to barriers to entry. Bruce Greenwald, an economist at Columbia University, is fond of saying, “In the long run, everything is
a toaster.” He picked the toaster to symbolize a mature, competitive business with no barriers to entry and no excess returns.” page 19

“Research by Robert Wiggins and Timothy Ruefli, professors of management, shows that not only is reversion to the mean in clear evidence for the corporate world, but also that returns are converging at a faster rate today than they did in the past.” page 20

“The sad fact is that there is significant evidence that investors—both individual and institutional—fail to recognize and reflect reversion to the mean in their decisions. To illustrate, the S&P 500 Index generated returns of 8.2 percent in the twenty years ended 2009. The average mutual fund saw returns of about 7 percent, reflecting the performance drag of fees. But the average investor earned a return of less than 6 percent, about two-thirds of the market’s return” page 21

“Christensen studied why great companies with smart managements and substantial resources consistently lost to “disruptors,” companies with simpler, cheaper, and inferior products. He describes two ways that this can happen. In one case, the disruptors introduce a product that is at the low end of the market and that is neither profitable for the incumbents nor in demand from the incumbent’s current customers. Incumbents are motivated to flee the low-end segment of the market and to focus on more value-added products. This becomes a problem as the disruptors improve their offering and move up market, eventually encroaching on the core business of the incumbent, and doing so with a lower cost structure.” page 23

“The central insight is that the more the outcomes of an activity rely on luck (or randomness), the more powerful reversion to the mean will be” page 24

Pages 25-27 were too excellent to cherry pick any segments out. I recommend reading those concluding pages in their entirety.

I now believe the question of whether EMH is true or not is nonsensical. The right question is how efficient is the market. As with almost everything there is no black and white, but shades of grey.

If the question is, “can an individual investor beat the market?”, the answer is clearly yes. Yes from the point of view of pure statistics based on normal distribution, or even “fat tails” distribution. In normal parlance, some guy/gal will always get lucky.

If the question is, “can individual investors as a class beat the market?”, the answer is clearly no, because the implication of a “yes” answer will be that institutional investors as a class must perform below the market, given that both classes added together comprise the market.

The discussion needs to be reframed.

I suspect you are revisiting the hypothesis of whether EMH is true or false.