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One More Obstacle for Would-Be Market Beaters

One More Obstacle for Would-Be Market Beaters

Ron DeLegge, Editor

May 12, 2008


SAN DIEGO ( - In his groundbreaking 1970 survey, Eugene Fama argued that the capital markets were efficient. In other words, securities markets were sufficiently good at reflecting information about more than just individual stocks, but the market as a whole. His point was that neither fundamental or technical analysis would help investors to achieve returns in excess of an efficient market. Was he right?


Most academic financial economists of Fama's generation generally agreed with him. Still, he had his detractors.


Without surprise, most of them worked as active money managers or Wall Street analysts. Back then, making a case against Fama's efficient market findings was a lot easier than it is today. Why? Because analysts and institutional investors were able to wield their influence by gaining access to corporate information before the general public. Those were the good old days!


Fast forward to the pivotal year of 2000. It was then that U.S. Securities and Exchange Commission (SEC) adopted "Regulation FD" also called "Reg FD". The rule, which was vigorously opposed, eliminated the practice of selective disclosure by publicly traded companies. It was the fear of some, Reg FD would have an opposite effect by creating less disclosure, not more. Today, Reg FD is the law. In essence, it requires that publicly traded companies must release any information at the same exact time to analysts, institutional investors, and the general public. It also requires this information to be readily accessible to all.


The idea that Reg FD has given an advantage to the investing public couldn't be more wrong. The full and fair disclosure of information by publicly traded companies is a right, not an advantage. Regardless of how often, how much or the timing of when information is released, investors still have to sift through the data and make informed decisions. The evidence shows most of them aren't very good at doing this either. Professional investors do much better, but still not good enough. Most consistently underperform key stock market indexes, which begs the question: If beating the market was a monumental task before the advent of Reg FD, what is it now?


Even if you object to Fama's arguments of an efficient stock market, you'd be a fool to discount the impact of Reg FD. Today, the regulatory environment of the U.S. capital markets seems to reinforce, not negate, Fama's original findings. Professional money managers no longer have an information edge over the investing masses like they did before. Don't let the five computer monitors on the desk trick you.


For these reasons and more, it's getting harder, not easier, to beat major benchmark indexes.


This is all the more reason to make index exchange-traded funds (ETFs) and index mutual funds (when you can't use ETFs) the foundation of your investment portfolio. If the majority of your portfolio is not indexed to the market, I'm convinced you're making a financial blunder larger than you comprehend.


Never before has it been so difficult to argue against the efficiency of the financial markets. And don't blame Eugene Fama or anyone else. Blame Regulation FD. 

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