Recent events in financial markets around the world have made the question of whether it is possible for an individual investor to outperform the market as a whole extremely timely. In the short-term, luck, timing, and possibly insider information can make it possible to outperform the market. But in the long-term, the efficient market hypothesis holds that the market renders anything but normal profits impossible. This research evaluates the efficient market hypothesis and whether it is possible for an individual investor to outperform the market in the long-term.
The efficient market hypothesis holds that capital markets are efficient in that they do not enable above-average reward without above-average risk. This "efficiency" comes about from the idea that all known information about a company at any point in time is reflected in the price of that security at the same point in time. Unknown information will have an unknown effect on the price, but when the unknown becomes known, the market will rapidly reflect that information in the price (Malkiel, 2003).
In order for an investor to outperform the market, it is necessary to be able to predict the behavior of the market over the long-term. Short-term predictions, whether based on luck, insider information, or manipulation through online blogs and similar outlets, can yield short-term gains that outperform the market over the course of a day or even a few months. The efficient market hypothesis holds that long-term predictability is not possible, however, because the known information is already reflected in the price. If someone could predict the stock market's behavior and act accordingly, then there would indeed be wealth to be made. Thus, in order to outperform the market, predictability must be part of the market, which runs counter to the efficient market hypothesis. To outperform the market in the long-term, investors must first reject th...