Academic journal article Business and Economics Research Journal

Who Are the Market Beaters: Lucky Investors, Insiders or Who Else?

Academic journal article Business and Economics Research Journal

Who Are the Market Beaters: Lucky Investors, Insiders or Who Else?

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Over-performance of investors is always one of the most interesting topics in Finance. There are academic and non-academic books, papers and newspaper columns which explain the secrets of the market, but we can see only some investors such as Warren Buffet, and George Soros who consistently beat the market. The question of whether markets are efficient is central to investment valuation. Those who do valuation well will be able to make 'higher' returns than other investors, because of their capacity to spot under and over-valued firms (Damodaran, 2012). That's why, having an idea about whether the market is efficient, or to what extent it is efficient is crucial in making investment decisions.

The recent financial crisis has also revealed the need of understanding the structure of financial markets. Analyses in both the academia and the industry have re-focused on the basics of definitions, descriptions and theories. One of the things which have come up for discussion in recent years is Efficient Market Hypothesis (Malkiel & Fama, 1970). There are several studies (Basu, 1977; Fama, 1991) that are trying to question the relevance of the hypothesis.

Most of the literature for the market efficiency emphasizes the role of informational efficiency. While Malkiel and Fama (1970) has an evidence of weak form and semi-strong form efficiencies, Fama (1991) states the stronger form of efficiency. In this study we are mainly interested with the strong form efficiency. Strong from of market efficiency implies that prices reflect all private (inside) information. This form of efficiency investigates whether investors can earn abnormal profits by trading on private information. Testing for strong form of efficiency focuses on the groups of insiders whether any private information can be used to generate abnormal returns (Chaudhuri, 1991; Del Brio, Miguel, & Perote, 2002; Tahaoglu & Guner, 2011).

There are some studies which define the efficiency by considering market beating situations. Fama (1995) which is one of the pioneer studies related to the relationship between market efficiency and beating the market, mainly indicates that there is no actual situation of consistently beating the market under the conditions of rationality in the market. According to Statman (2011), "The modest definition of efficient markets is their definition as unbeatable markets". In this study, the term of 'unbeatable market' is defined with the condition of the inability of investors to generate consistent positive alphas from their security investments. Coval, Hirshleifer and Shumway (2005) also employs the market beating conditions for the definition of market efficiency. Here, in accordance with this paper, risk adjusted return performance of investors should be random in line with the efficient market hypothesis unless there is a private information for investors.

On the other hand, the fact remains that some studies in the literature investigate how investors beat the market. The literature related to how or who beats the market generally focus on individual investors. For example, Coval et al. (2005) provides evidence that while some individual investors underperform the market, other investors have superior investment skills. By learning about and developing their ability through trading, investors can get abnormal returns. Barber and Odean (2000) states that the best-performing individual investors outperform the market on average by 0.5 percent per month. The most remarkable conclusion that they reach is that individual investors with high trading levels show poor performance. So they conclude that trading is hazardous to wealth of individual investors.

A current study of Dahlquist, Martinez and Söderlind (2016) finds that active investors earn significantly higher returns than inactive investors. In this study, performance decomposition analysis demonstrates that most of the outperformance of active investors results from these investors successfully timing their investments in funds and asset classes. …

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