THE POWER OF MARKETS
THE POWER OF FINANCIAL MARKETS
Generally, markets do a remarkable job of allocating resources, and financial markets allocate a specific resource: financial capital. Financial markets are also made up of millions of participants, and these participants voluntarily agree to buy and sell securities all over the world based upon their own needs and desires. Each day, millions of trades takes place, and the vast collective knowledge of all these participants is pooled together to set security prices. World Equity Trading in 2015 on a daily average saw $98.6 million trades with a dollar volume of $447.3 billion. This goes to show the staggering magnitude of participation in the world equity markets on an average day.
Any individual trying to outguess the market is competing against the extraordinary collective wisdom of all of these buyers and sellers. In the end, trying to outguess the market is incredibly difficult and expensive, and over the long run, the result will almost assuredly be inferior when compared to a market-based approach. Professor Kenneth French has been quoted as saying, "The market is smarter than we are and no matter how smart we get, the market will always be smarter than we are." One does not have to look far for data that supports this. Data shows that only 17% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years.
In the end, the power of markets benefits all of us. For an investor, we believe the lesson here is that instead of fighting the market, one should pursue an investment strategy that uses market prices and the information they contain in its design and day-to-day management. In doing so, an investor has access to the rewards that financial markets make available to providers of capital.