Markets Work

From DFA Canada:

Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.

A Picture of Growth
Growth of $1

In US dollars. For the eighty years from 1926 to 2005, the compound annual growth rate of return was 11.77% for the Small Cap Index, 10.36% for the Large Cap Index, 5.50% for the Long-Term Government Bonds Index, 3.70% for T-Bills, and 3.05% for Inflation (CPI). Large Cap Index is the S&P 500 Index®; Long-Term Government Bonds Index is Twenty-Year US Government Bonds; T-Bills are One-Month US Treasury Bills; Inflation is the Consumer Price Index. Small Cap Index provided by the Center for Research in Security Prices (CRSP), University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. Bonds, T-Bills, and Inflation provided by © Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work of Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economies thrive—not because markets fail but because they succeed.
The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk. It is certainly possible to outperform markets, but not without accepting increased risk.