Enrich Your Future 06: Market Efficiency and the Case of Pete Rose

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 06: Market Efficiency and the Case of Pete Rose.LEARNING: Don’t try to pick stocks or time the market. “The evidence is very clear. The stocks retail investors buy underperform after they buy them, and the stocks they sell go on to outperform.”Larry Swedroe In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over the 30 years to help investors as the head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 06: Market Efficiency and the Case of Pete Rose.Chapter 06: Market Efficiency and the Case of Pete RoseMany people have difficulty understanding why smart investors working hard cannot gain an advantage over average investors who simply accept market returns. In this chapter, Larry uses an analogy in the world of sports betting to explain why the “collective wisdom of the market” is a difficult competitor.The case of Pete RosePete Rose was one of the greatest players in the history of baseball, finishing his career with more hits than any other player. It seems logical that Rose would have a significant advantage over other baseball bettors.Rose had 24 years of experience as a player and four years as a manager. In addition to having inside information on his own team, as a manager, he also studied the teams he competed against. Yet, despite these advantages, Rose lost $4,200 betting on his own team, $36,000 betting on other teams in the National League, and $7,000 betting on American League games.This reveals that if an expert like Rose, who had access to private information, could not “beat the market,” then it’s very unlikely that ordinary individuals without similar knowledge would be able to do so.Sports betting market efficiencyLarry shares other examples of the efficiency of sports betting markets. One such example is a study covering six NBA seasons in which Professor Raymond Sauer found that the average difference between point spreads and actual point differences was astonishingly low—less than one-quarter of one point.In horse racing, the final odds, which reflect the judgment of all bettors, reliably predict the outcome—the favorite wins most often, the second favorite is next most likely to win, and so on. This predictability of the market further emphasizes the futility of trying to exploit mispricings and the need for a more reliable investment strategy.Larry goes on to quote James Surowiecki, author of “The Wisdom of Crowds,” who demonstrated that as long as people are acting independently (not in...