Philosophy / 
Markets Work

Markets reflect the vast, complex network of information, expectations, and human behavior. These forces drive prices to fair value. This simple yet powerful view of market equilibrium has profound investment implications.


Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk. 


Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong securities at the wrong time. Meanwhile, capital economies thrive--not because markets fail but because they succeed.

A Picture of Growth
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For the 88 years from 1926 to 2013, the compound annual growth rate of return was 11.7% for the Small Cap Index, 10.1% for the Large Cap Index, 5.5% for the Long-Term Government Bonds Index, 3.5% for US Treasury Bills, and 3.0% for US Inflation (CPI). Small Cap Index is the CRSP 6-10 Index; Large Cap Index is the S&P 500 Index®; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury Bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. Bonds, T-bills, and inflation data© Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk. It is certainly possible to outperform markets, but not without accepting increased risk.

 

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Many studies have discussed whether securities are efficiently priced. The available evidence indicates that professional money managers have not been able to exploit cost-effectively any pricing errors that do occur.