Sep 27, 2010
Many experts characterize the current environment as a "stock picker's market." Is there any evidence that stock selection is more successful under certain market conditions?

EFF/KRF: They can't be experts since, as Bill Sharpe pointed out in 1991, this is a fallacy of arithmetic. In aggregate, investors hold the market. This means that, before fees and expenses, the alpha for investors as a whole is always zero. Our recent mutual fund paper says that, in aggregate, passive mutual funds nail their benchmarks: their aggregate alpha is zero. If this is true for passive investors more generally, it implies that the aggregate pre-cost alpha of active investors (stock pickers and other types) is also always zero–regardless of market conditions. Active investors can only win at the expense of other active investors.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.