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Baked in the Cake

year, they were stunned to discover the dartboard portfolio had outperformed the portfolios of Wall Street gurus. The academics arrived at a devastating conclusion: The success of top traders was simply due to luck, and patterns in prices appeared by chance alone. In 1992, 63 years after the stock market crash, John Stossel of ABC’s 20/2048 program conducted some follow-up research on the dart throwing. He determined the economists’ findings from more than six decades prior remained true. Stossel interviewed Princeton Professor Burton Malkiel, author of A Random Walk Down Wall Street. Professor Malkiel reminded viewers that stock markets have historically delivered a performance of 9.5% to 10% per year. “To beat the average, should an investor listen to the Wall Street professionals?” Stossel asked. “No,” replied Malkiel. “All the information an analyst can learn about a company, from balance sheets to marketing material, is already built into the stock price because all of the other thousands of analysts have the same information. What they don’t have is the knowledge that will move the stock such as news events, which are unpredictable and impossible to forecast.”

Baked In The Cake Stock pickers don’t realize that virtually all of the information and forecasts about a stock, a sector, or an economy is quickly digested by the totality of market participants and swiftly embedded into the price. This market efficiency ensures that prices agreed upon between willing buyers and willing sellers

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