Sep 27, 2010
Q&A
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.

 
ABOUT FAMA AND FRENCH
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
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.