There is an emerging field called Behavioral finance that attempts to study the human side of the markets. Interesting stuff, but not of much use to the mainstream.

They just gave the Nobel Prize in Economics to one of the premiere academics in this field, Daniel Kahneman. He along with Amos Tversky came up with “Prospect theory” One very important result of Kahneman and Tversky’s work is demonstrating that people’s attitudes toward risks concerning gains may be quite different from their attitudes toward risks concerning losses.

For example, when given a choice between getting $1000 with certainty or having a 50% chance of getting $2500 they may well choose the certain $1000 in preference to the uncertain chance of getting $2500 even though the mathematical expectation of the uncertain option is $1250. This is a perfectly reasonable attitude that is described as risk-aversion. But Kahneman and Tversky found that the same people when confronted with a certain loss of $1000 versus a 50% chance of no loss or a $2500 loss do often choose the risky alternative. This is called risk-seeking behavior. Essentially, they reasoned that we are not generally risk averse, we are loss averse.

I would like to add a comment about Buffet. He buys, often the entire company, and holds. That isn’t the same stock picking game we are talking about. Sure he uses financial analysis but he isn’t trying to beat the market over the next 90 days, more like the next 90 years. He simply finds great companies and buys them for reasonable prices and keeps them. A far cry from what a mutual fund manager does. He understands the businesses he’s in fully. If he doesn’t understand it, he doesn’t buy it (how many fund managers can say that?). He really isn’t an apples for apples comparison with someone that is touting their stock picking skills.

Beating the market has been done. No doubt by many over a short period and fewer as the period increases. Also, the individuals that beat the market over a period have grasped a certain set of variables that works for that period of time and as time goes on the variables change and they may or may not recognize the changes. (And some probably just got lucky) This is what makes it difficult to beat the market over time; its dynamic. Looking at the past isn’t a clear indication of the future. The game is in a constant state of flux.
But having individual cases of beating the market doesn’t prove or disprove the hypothesis as they are almost certainly statistically insignificant, especially when the time periods are short. And remember this isn’t a natural law like gravity, its a hypothesis; A tentative explanation that accounts for a set of facts and can be tested by further investigation; a theory. This “hypothesis” is very difficult to test and has some limiting assumptions. So think of it as a way to view the world and determine if which view makes sense to you.

Obviously, financial analysts are going to believe in what they are doing and tend toward the weak form. Also, technical analysts are going to tend to not believe in any form. Both types of analysts work in major investment firms and get paid for doing something others don’t believe in.

Also, to some, beating the market seems to imply vast riches when in reality if the market is down 15% beating it would only require you to lose less than 15%. So just beating the market isn’t good enough to get you a yacht on its own merits.