[patio11]

Much like the monkey throwing darts at the stock market chart who clocks professional money managers on average, this result proves nothing about rats or markets. It provides further experimental proof for the worst kept secret in history: professional money manager systematically destroy value.

[yummyfajitas]

While it is certainly true that professional money managers don't beat the market on average, this does not imply that they destroy value.

Professional money managers and speculators in general, at least in principle, more efficiently allocate capital as a result of their speculative activities. This causes overall returns to increase. In a world without money managers/other speculators, market returns would be lower overall.

The simple model: in a world without money managers/speculators, overall returns might be 2%. In a world with 1 speculator, returns might be 2.1% and that speculator might achieve returns of 4%. In a world with many speculators, they might all achieve returns of 4%, and none of them would be beating the market. They are creating value, however.

(Another reason they don't beat the market is that many of them are not trying to. The manager of my Vanguard Target Retirement 2050 fund is currently trying to beat the market. In 2040 his goal will be to minimize risk.)

[Retric]

The stock market has little to do with allocating capital. The bond market does, but the stock market is mostly about valuing short term and long term risk with associated rewards.

[chengas123]

Huh? The stock market absolutely has to do with allocating capital. It, together with the bond market, is the place where large companies go when they need to raise funds.

Bond traders and stock traders alike both balance the risk and reward of a company's offering in order to determine a fair value for that offering. Valuing risk and reward is valuing the company and valuing the company is the most critical part of a stock offering. Any post on here about raising money from a VC will talk about the valuation of the startup.

[Retric]

A small percentage of stock market transactions are Company to Investor. Most transactions are Investor A to Investor B which only indirectly impacts a company’s value. Clearly they are related, but it's generally much better for investors in healthy companies for that company to get money from the bond market than the stock market.

PS: Consider a company with consistent revenue/dividends but zero transitions on the stock market. Its value is going to be heavily influenced by stock market conditions, but it's ability to raise money is going to be dominated by the state of the bond market.

Edit: My point is what it means when a transaction between Invester A and Invester B happens on the stock market at a given price.

[chengas123]

It is often better for a company to raise money from the bond market, but only up to a point and only because of the tax implications.

http://en.wikipedia.org/wiki/Trade-off_theory_of_capital_str...