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>There are plenty of professional investors who have beaten the market year after year, and by a lot more than single digit percentages. Multi-decade returns of 20% and above are well documented. I personally invested in a fund 12 years ago which has returned a compound 21% pa return over that period, so I know that they definitely exist.

>The chance of this happening due to luck is impossibly low.

The chance of this happening by chance to some investors (though not particular investors) in a sufficiently large group of investors will approach 100%. Also, depending on the density of the relationships between investors and the amount of attention they get for their returns, the odds of one of those investors being within a friend of a friend of yours will also approach 100%.

The existence of runs is not evidence against randomness.

"The existence of runs is not evidence against randomness."

If you flip a coin a hundred times and it comes up heads 98 times, you're probably safe in assuming it's a biased coin.

> If you flip a coin a hundred times and it comes up heads 98 times, you're probably safe in assuming it's a biased coin.

OTOH, if you flip it several billion times and it has a run of 98 heads, you can't, on that basis alone, conclude that it is a biased coin.

You can't just pull the run out and treat it as if it was the whole universe of data.

I'd still put a pretty high likelihood that it's biased. A run of 98 in 10 billion flips of a fair coin is vanishingly unlikely.

"Multi-decade returns of 20% and above are well documented."

The few that exist might be documented (but please enlighten us on where), but if they are, it's most likely because they are so rare.

"I personally invested in a fund 12 years ago which has returned a compound 21% pa return over that period, so I know that they definitely exist."

That's exactly what the GP says - of course there are, but how do you which ones will be, and know you didn't stumble into this one by chance? Your story might just be survivor bias. When I look at the funds my banks offer, there are some that offer 10%+ returns for the last years. Thing is though that they offer dozens of funds, all of which look equally likely in their prospects. How do I know which one to pick? Their yields are normally distributed, just as one would expect.

No, you're getting it confused. For a start, the fund that I bought into advertised exactly what they expected (it is based on a computerised trading model, so they know what to expect if it worked). It is not 'chance' that I happened onto a fund - what we are talking about is random chance that anyone can have consistent above-market returns. Certainly it is possible for any one individual to have a chance occurence of a high return one year- the EMT would say that next year the chance is for a loss. When people or firms put together year on year of consistent returns above market, that is no longer chance.

there are a lot of investment funds out there. even if none possess any skill, it is possible for a few to produce extreme risk-adjusted performance simply by chance.

Still not getting the point here.

- One individual or fund doing well in any particular year = random chance

- One individual or fund doing well for a decade = chance is not a possible explanation

Essentially the chance of getting a heads on a coin flip is a 50/50. If you get heads, it's a chance event.

However, if you do 10,000 coin flips and end up with 8,000 heads, either the flipper or the coin have an edge in making heads turn up. The pattern shows that it is no longer a random 50:50 chance.

If a fund has 50% random chance of doing well in a particular year, then 1 of 1000 funds will do well for a whole decade purely from chance. There are thousands of funds, so existance of funds with 10/10 good years should expected even if they are purely random.

No, you are not getting the point. When you do millions of 10000 coin flips, the chance that one of them will be 8000 heads is not 50:50. Look up 'birthday paradox'.

Exactly, let's not extend the conclusions of the article: it's not that it's impossible to consistently beat the market average, it's just that it's extremely unlikely for the "general public".

EMT is probably approximately true, specially with fast algorithmic trading and automated analysis. But the degree of accuracy is key -- some applications are highly sensitive to how good this approximation is, allowing big gains. Also, in practice, there is a "zero sum" part of trading, and that necessarily implies that someone is going to make money and someone will loose (disregarding the other part). Whoever has the best model wins consistently.

"There are plenty of professional investors who have beaten the market year after year"

"Multi-decade returns of 20% and above"

Do you have any proof of these over the top claims?

Peter Lynch. He managed the Fidelity Magellan Fund from 1977 to 1990 and averaged a 29% annual return over that period.

http://en.wikipedia.org/wiki/Peter_Lynch#Fidelity

13 years is not multi-decade.

I'm surprised anyone would think that 20% returns are over the top - outsized returns in markets are hardly an industry secret. Triple digit returns are not unheard of. Most of the people making big money don't exactly advertise and some are downright reclusive. But they certainly do exist.

I recommend reading http://www.amazon.com/The-New-Market-Wizards-Conversations/d... and the other versions in the series - I think there is 4 now. These are candid interviews with the individuals involved. They are good reading just for the interested entrepreneur.

Warren Buffett?

The only professional investor I am aware of returning 20%pa was Bernie Madhoff, and we all know how that turned out.

http://en.wikipedia.org/wiki/James_Harris_Simons#Business_ca...

Perhaps you should look into Warren Buffett. I hear he's pretty good too. Peter Lynch was alright as well.