Beating the stock market over the long run is almost impossible, but you should try anyway. The occasion to discuss how both of these statements can both be true is the 50th anniversary of the publication of “A Random Walk Down Wall Street.” In this book, which quickly became a classic, Burton Malkiel — a Princeton University economist — argued that stock price gyrations are random and therefore unpredictable. Some advisers will beat the market in the short-term, but hardly any will do so consistently over years.
The evidence in favor of Malkiel’s argument is overwhelming, as I have pointed out many times before. In a recent column, for example, I noted that the percentage of mutual funds able to beat the market over successive periods is close to what you’d expect from pure randomness. The clear implication of Malkiel’s argument is that we should invest all of our stock-market money in a broad index fund and never trade. In fact, according to an under-appreciated study from two decades ago, this implication follows only if we are completely certain that no manager is able to beat the market over time. As soon as we relax that belief by even the smallest amount, then according to this study it becomes irrational not to allocate a significant chunk of your portfolio to the managers who have beaten the market the most over the long term. This study, entitled “Should investors avoid all …