“Do You Believe in the Efficient Market Theory? I Think It’s Nonsense”

If you own any mutual funds, you essentially believe in the Efficient Market Theory. The Efficient Market Theory was thoroughly explained in Burton Malkiel’s A Random Walk Down Wall Street. The following is a definition of the Theory from InvestWords.com:

"The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insider information, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isn't already reflected in the stock's price. Proponents of this theory do not try to pick stocks that are going to be winners; instead, they simply try to match the market's performance. However, there is ample evidence to dispute the basic claims of this theory, and most investors don't believe it."

When someone purchases a mutual fund, he/she is essentially agreeing with EMT. The thought process is as follows: it is impossible to beat the Market so I will buy a basket of stocks to spread the risk and hopefully achieve a 7% return after fees. My question for those who purchase mutual funds is simply this: Why don’t you either take the time to beat The Market, (large numbers of people exceed index averages annually), or just invest in a broad based ETF and hope for the best? I am amazed that people continue to pay the fees for mutual funds after the meltdown of 2008.

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