Trying to beat the market sounds appealing. After all, who wouldn’t want to consistently outperform the stock market and grow their wealth faster? In reality, outperforming the market is incredibly difficult. The Efficient Market Hypothesis (EMH) suggests that markets quickly absorb all available information, leaving little room for investors to find a consistent edge. While occasional outperformance is possible, repeated long term outperformance is rare. In this post, we’ll explore why markets are hard to beat, what costs erode investor returns, how skill and luck blur together, and most importantly, what you should focus on instead.
The Efficient Market Hypothesis, first formalized by economist Eugene Fama, states that asset prices reflect all available information. As a result, it becomes exceedingly hard for investors, especially active managers, to consistently buy undervalued or sell overvalued securities.
Three Forms of Efficient Market Hypothesis
Even if markets aren't perfectly efficient, they are efficient enough to make consistent outperformance extremely challenging, especially after fees and taxes.
Markets aren’t flawless. Booms and busts, like the Dot-com bubble or the 2008 financial crisis, highlight periods where prices diverged significantly from fundamentals. These mispricings often result from behavioural biases:
These inefficiencies can be exploited, but only by disciplined investors with long-term conviction, not those chasing trends.
Even when active managers outperform gross of fees, their net returns are often underwhelming. That’s because:
Losing just 1 percent annually to fees may not seem like much, but over 30 years, it can reduce your ending portfolio by over 25 percent. Losing 2 percent annually over the same period can shrink it by 45 percent. That’s why minimizing costs is central to SciVest’s investment approach.
Many institutional investors face constraints that limit their performance:
As Nobel laureate William Sharpe noted in The Arithmetic of Active Management, active investing is a zero-sum game before costs. After factoring in fees and transaction costs, active investors, on average, will underperform the market. This isn't opinion, it’s simple math.
Effective strategies, such as value investing or factor investing, often underperform for years before paying off. Unfortunately, many investors abandon them too soon:
Staying the course requires discipline and patience, qualities that can be more important than raw intelligence in investing.
If an investor outperforms over a ten-year period, was it due to skill or randomness? Research by Fama and French shows even decade-long performance can be driven by luck, especially among thousands of mutual funds. Without consistent, repeatable outperformance across different market environments, it’s hard to distinguish genuine skill from statistical noise.
Active management isn’t dead. It is just most effective when applied deliberately and selectively. Some areas of the market remain inefficient, offering opportunities for skilled managers:
Success in these areas still demands:
Fees, taxes, and transaction costs silently erode long-term returns. Consider a 1 percent annual fee on a $100,000 investment growing at 6 percent over 30 years reduces the ending value by nearly $142,155, a lost of almost 25%
At SciVest, we minimize investment costs by using:
Even strong strategies can be undone by high costs.
Markets go up over time, but not in a straight line. Investors must weather:
The key is not avoiding volatility, but surviving it. Selling after a drop often means missing the rebound. A long-term mindset and diversified portfolio can help investors stay invested through the storm.
You can’t control markets, but you can control:
At SciVest, we believe long-term wealth is built not by chasing market outperformance, but by aligning your portfolio with your personal goals, managing costs, and maintaining discipline through every market cycle.
Beating the market is exceptionally difficult, even for professionals. Rather than chasing short-term outperformance, investors are better served by focusing on what they can control: costs, asset allocation, diversification, and behaviour. By aligning with SciVest’s core beliefs, particularly long-term and unemotional investing, you can build a portfolio that supports your financial goals through all market conditions.