In theory and in practice

I read with interest John Bogle’s letter in the Economist (“Fama not in the Vanguard”, November 2nd) in response to Eugene Fama sharing the Nobel prize for economics. Fama won the Nobel prize for his work on the Efficient Markets Hypothesis that proposes security prices fully reflect all available information, are therefore efficient and that it is extremely difficult to beat the market return over the long-term. Bogle disagrees with Fama on the theoretical underpinnings of efficient markets saying that sometimes markets are efficient and sometimes they are not.

Ultimately the question of efficiency boils down to whether money managers can beat the markets consistently over the long-term. In this respect both Bogle and Fama agree that in practice evidence would indicate that money managers as a group cannot consistently beat market return because of the fees and costs charged by active managers. While there may be some disagreement regarding the conceptual idea of Efficient Markets, in this case both the theoretical and the practical come to the same conclusion, that there is scant evidence that active management beats market return consistently over the long term, and that it makes sense to invest in lower cost passive index-tracking funds instead.


Barry Brosnan
Investment Advisor

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