With all the amazing changes and “advancements” in finance
over the last thirty years, you would think they had figured out how to beat the
market. In fact, it is getting harder and harder to beat the market. We call
this the “paradox of skill.”
As more and more technology and more and more
expertise is applied to beating the market, this increase in skill
paradoxically makes it more and more difficult to beat the market.
Just as
athletes today are bigger and stronger compared to athletes of yesteryear, so
to investment managers of today are smarter and quicker than ever before.
However, unlike improvements in athletic performance, there are no discernible
improvements in alpha (beating the market) by market participants. And not only
that, but it requires an incredibly long performance history to gather
sufficient data to make any statistical inferences as to whether outperformance
was a result of skill vs luck.
Good luck with that.
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