The market is efficient based on the efficient market hypothesis (EMH), which is described as follows:
"Asset prices in financial markets fully reflect all available information at any given time, thus, it is impossible to consistently achieve higher-than-average returns through stock picking or market timing, as prices adjust almost instantly to new information"
However, there are many occasions when market prices have proved that this is not always the case because market anomalies exist such as the January effect, October effects, Santa Claus rally, etc. If the efficient market hypothesis is correct all the time, there wouldn't be any money manager beating the average annual return of the stock market by more than 12 %. Historically, many money managers, hedge fund managers, or investors have proven that the market is beatable by a large margin.
Warren Buffett (Berkshire Hathaway, since 1965 ) - 20%
Peter Lynch (Fidelity Magellan Fund, 1977-1990) - 29.2%
Jim Simons (Renaissance Technologies, Medallion Fund) - 66%
Joel Greenblatt (Gotham Asset Management, 1985-2006) - 40%
Stanley Druckenmiller (Duquesne Capital, 1981-2010) - 30%
Carl Icahn (Icahn Enterprises, 1968-present) - 31%
Ray Dalio (Bridgewater Associates, Pure Alpha Fund) -12%
George Soros (Quantum Fund (1970 to 2000) -30%
The best of all, the well-known money manager and the highest annual average return is Renaissance Technologies hedge funds. Renaissance Technologies is a highly secretive and extraordinarily successful hedge fund firm specializing in quantitative trading. It was founded by James Simons, a former mathematics professor and cryptographer. The firm is known for its heavy reliance on mathematical models, data science, and algorithmic trading to generate returns that have consistently outperformed the market.
One of the most effective ways to take advantage of the money-making opportunity is finding a market mistake. The stock market occasionally makes a mistake and becomes inefficient and provides you opportunity to make money. The question is, how do you find market errors and market Inefficient?
These are the statements made by Renaissance Technologies in the book "The Man Who Solved the Market" on market efficiencies and some other factors regarding the money-making trading system.
- "The efficiencies are so complex they are, in a sense, hidden in the markets in code. We find them across time, across risk factors, across sectors and industries."
- "Even more importantly: Renaissance concluded that they (efficiencies) are reliable mathematical relationships between all these forces.
- "Applying data science, the researchers achieve a better sense of when a various factors were relevant, how they relate, and the frequency with which the influence shares."
- "They also tested it to tease out subtle nuanced mathematical relationships between various shares, - What staffers call- Multidimensional anomalies"
- “These relationships have to exist since companies are interconnected in complex ways.” “ The interconnectedness is a hot model and a product with accuracy and changes over time”
- "We built the machine to model this interconnectedness. "
- "Outsiders didn’t quite get it, but the real key was the firms engineering. How it puts all those factors in a forces together in an automated trading system. "
- "We understand risk, cost, impact, and a market structure well enough to leverage the hell out of it."
Recognizing and identifying these efficiencies and inefficiencies to increase the odds of winning.