The Other Side

Fama (1998) abstract:

Market efficiency survives the challenge from literature on long-term return anomalies. Consistent with the EMH that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversals. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.

Working through this paper (I am not yet complete), Fama's argument is that because evidence has been found of both over-reaction and under-reaction, and because no model can be found to explain both sufficiently, that you can't reject Market Efficiency.

It is also a useful survey, though 10 years old, of the other work that had been done. I have not found a paper yet specific to what I am looking for. In other words, measures of investor behaviour in managed funds. This is an extension though of whether manager's themselves can add value. 

Author's such as Nassim Taleb cast doubt on our ability to identify these managers since the number out there, and chance, dictates that some will outperform over extended periods. So like Fama, `anomalies' can be attributed to randomness.

Stepping aside from academic models for a second though... doesn't it make intuitive sense that if the market is a fractional interest in a business, then doing your due diligence and allocating money properly is likely to lead to better returns than average? Clearly in order to outperform, you are going to have to make better decisions than average. Average decisions less costs will underperform no decision and an investment in `the average decision'/index.

It is difficult to come up with measures for wealth destruction if there is no consensus on whether or not added value can be gained at all.

Fortunately, I don't need to look for consensus. While I will continue to read and comment on papers from both sides... I find the evidence that it is possible to create and destroy value compelling.