The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

Consider the following set of seven statements, which are related to the idea of the efficient-market hypothesis and whether an individual investor can beat the stock market. Each statement is an approximation, but each builds on the last one to become slightly more accurate. No investor can beat the stock market. No investor can beat the stock market over the long run. No investor can beat the stock market over the long run relative to his level of risk. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs, unless he has inside information. Few investors beat the stock market over the long run relative to their level of risk and accounting for their transaction costs, unless they have inside information. It is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their level of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off investing in an index fund.