The only one who is smarter than anybody is everybody.

Markets reflect the vast, complex network of information, expectations, and human behavior. These forces drive prices to fair value. This simple yet powerful view of market equilibrium has profound investment implications. No one individual or firm knows more than the collective wisdom of 7 billion people.

A great way to test this theory is to see the amount of active mutual fund managers that have been able to beat their respective benchmarks. Their performance have been dismal, in fact no more than random chance alone and statistically insignificant.

A fundamental component of Free Market Investing is the Efficient Market Hypothesis, first explained by Eugene F. Fama in his 1965 doctoral thesis:

“An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.” Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.