Mediocrity Isn’t What It Used To Be

I’ve been reflecting on the immense volatility in the equity markets of late. Volatility of this magnitude suggests that the market isn’t totally efficient. For instance, last week didn’t seem to provide that much “news” on which to base the large moves in the major indices. And throughout these last few months, our portfolio strategy has enjoyed significant out-performance of the S&P500, suggesting market inefficiency.

Why isn’t the market totally efficient? The topic, and the related, “is the market efficient,” have been the subject of numerous written opinions.

I’ve come to a tentative conclusion this week that one major reason for market inefficiency, contrary to longstanding theory, is that all market participants are not equal in their ability to use, or process, information. Some are simply mediocre, and they generate so much ill-conceived action that it swamps the volumes generated by their more-skilled colleagues.

While I’ve studied statistics for roughly 30 years, it is only recently that this aspect of efficient markets theory occurred to me. It’s as if the theory’s developers forgot one important assumption: not only must information be available to all in order to be correctly and rapidly priced into the market, it must be used with equivalent skill by all participants.

I suspect that much market activity is dominated by the broad class of average, that is to say, mediocre, analysts, money managers and fund allocators. Thus the apparent reason why some investors out-perform the market over time, while most cannot.

The same idea, of course, applies to the companies whose equities many of us trade. It has much to do with why my own approach works.

And, as educational standards in the US have slipped during my own lifetime, it’s reasonable to assume that mediocrity isn’t what it used to be. It’s probably getting even, well, more mediocre.

To be continued……………