cording to tiie hiypothiesis, none could do so with regularity. The theorists, as we saw in the last section, focussed primarily on mutual funds, and, although the risk adjustment techniques are questionable, the evidence did show that funds as a group did little better or worse than the market over time.

However, this was not the final hurdle because, as noted, not all funds have to do better or worse consistently. In fact EMH makes a stronger statement: that no group of investors or any investment strategy can do better than the market over time. Thats where the trouble starts.

There are methods, supported by a large body of evidence, that consistently do better than the market, as do some mutual funds and money managers. The $63 billion Magellan Fund, for example, with over a million shareholders, and under three separate money managers, has outperformed die market for well over a decade. So did John Templeton and John Neff, the latter running billions of dollars for the Windsor Fund for over two decades. How are these outstanding records possible using only public information? Is it sheer chance, as EMH adherents are forced to claim? If it is, we must look at how many other institutional investors have outperformed, using statistics that can actually detect superior performance, not filter it out inadvertently as Jensens methods did. Whether large numbers of professional investors outperform or un-de erform the market is not settled, as the efficient marketeers would like to think; its wide open. The emphatic statement by these academics that the research available corroborates its central tenet, that professionals perform in line with the market, is impossible to accept without further evidence.

However, while the jury may still be out on the last point, it has come in with a unanimous decision on another. The verdict is solidly against EMH. The tenet that managers do not outperform or unde erform a market benchmark has a corollary: there is no method or system that can consistently provide higher retums over time. This may be the Waterloo of the hypothesis.

As we saw in chapters 6 to 9, a considerable body of literature demonstrates that contrarian strategies have produced significantly better retums than the market over many decades. The explanation for tiiis explicitly contradicts the central tenet of EMH-that people behave witii almost omniscient rationality in markets. As students of scientific method would anticipate, findings that threatened the existing beliefs were not met with garlands and victory parades by the new conquistadors.

cording to tiie liypotliesis, none could do so with regularity. The theorists, as we saw in the last secdon, focussed primarily on mutual funds, and, although the risk adjustment techniques are questionable, the evidence did show that funds as a group did little better or worse than the market over time.

However, this was not the final hurdle because, as noted, not all funds have to do better or worse consistendy. In fact EMH makes a stronger statement: that no group of investors or any investment strategy can do better than the market overtime. Thats where the trouble starts.

There are methods, supported by a large body of evidence, that consistently do better than the market, as do some mutual funds and money managers. The $63 billion Magellan Fund, for example, with over a million shareholders, and under three separate money managers, has outperformed the market for well over a decade. So did John Templeton and John Neff, the latter running billions of dollars for the Windsor Fund for over two decades. How are these outstanding records possible using only public information? Is it sheer chance, as EMH adherents are forced to claim? If it is, we must look at how many other institutional investors have outperformed, using statistics that can actually detect superior performance, not filter it out inadvertendy as Jensens methods did. Whedier large numbers of professional investors outperform or un-de e form the market is not settled, as the efficient marketeers would like to think; its wide open. The emphatic statement by these academics diat the research available corroborates its central tenet, that professionals perform in line with the market, is impossible to accept without further evidence.

However, while the jury may still be out on the last point, it has come in with a unanimous decision on another. The verdict is solidly against EMH. The tenet that managers do not outperform or unde erform a market benchmark has a corollary: there is no method or system that can consistently provide higher retums over time. This may be the Waterloo of die hypothesis.

As we saw in chapters 6 to 9, a considerable body of literature demonstrates that contrarian strategies have produced significandy better retums than the market over many decades. The explanation for this explicidy contradicts the central tenet of EMH-that people behave with almost omniscient rationality in markets. As students of scientific method would anticipate, findings that threatened the existing beliefs were not met with garlands and victory parades by the new conquistadors.

The Jury Is Out Again

The second major canon of EMH is the hypothesis that all new information is analyzed and almost immediately and accurately reflected into stock prices, thus preventing investors from beating the market. That the market reacts to some events quickly has been demonstrated by a number of researchers, as we saw in chapter 3. Stock splits do not result in higher prices, they state, indicating that this information is already reflected in their prices. The market reacts quickly to the announcement of mergers and acquisitions, they claim. They offer other, similar studies that seemingly back the semistrong form of EMH. Do these studies provide the convincing evidence the adherents claim?

ber one or number two rankings (its higliest ranking classifications) would have outperformed the market handily. The Value Line System was tested by Fischer Black, one of the deans of EMH, who found that the odds of it being pure chance were infinitesimal. This anomaly was also bothersome to the theory and resulted in a number of articles: some suggested risk-adjustment, others trading costs, others gleefully noting recent performance had slipped-unfortunately, it picked up again. The superior performance stood!

The tenet that no group of investors and no strategies should consistently unde erform in an efficient market is another rock EMH founders on. Below-market performance has been tumed in for decades by people who buy favorite stocks, as we saw in detail when we examined contrarian strategies. Another significant unde erformance, as we have seen, is the research that shows that IPOs have been dogs in the marketplace for 20 years.* So ove erformance and unde erformance, for long periods, neither of which the semi-strong form of EMH states is possible, show us both sides of the anomaly coin.

The anomalies show no sign of going away after two decades of challenge; rather, they have been gaining increasing strength in the last few years, as dozens of articles examine contrarian effects. The most important anomaly-strategies that beat the averages over extended periods-has been documented by Eugene Fama himself. His own data contradict his contention that efficient markets have held up well, since by definition, no method can beat the market over time.

This large body of contradictory research defies the believers in efficient markets to dismiss or explain. Thus goes the first major canon of efficient markets. The glaring anomaly holes this major tenet of EMH below the waterline.