There's quite a bit of evidence that even professionals don't show any ability to pick stocks or to predict market rollbacks. Most of the people we identify as skilled based on returns have probably just been lucky.
Interpretation
Even experts often lack the ability to predict market trends and may succeed due to chance rather than skill.
Eugene Fama's quote suggests that the stock market is highly unpredictable, and even seasoned professionals struggle to demonstrate consistent skill in picking winning stocks. He implies that the apparent success of those identified as skilled investors might be more attributable to luck than to a genuine understanding of the market's complexities.
In practice
This quote is perfect for a financial seminar discussing the unpredictability of investments.
The problem that people don't understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they're not really active. They have to make bets. What that means is there's a huge dispersion of outcomes that are totally consistent with just chance. There's no skill involved it. It's just good luck or bad luck.
After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse.
Market timing doesn't work. If all the bubbles and all this mispricing really exist, how come so few people see it before it turns out that way?
There's a company behind every stock and a reason companies - and their stocks - perform the way they do.
To be an investor you must be a believer in a better tomorrow.
Owning equities is an essential part of anyone's portfolio. You just can't ignore it over time. It's going to add the real pop to anyone's overall performance.
The (stock) market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.
When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.
Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.
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