The rewards of lottery tickets depend entirely on luck. In the equity market, similarly, those who earn a better return than the market average generally have luck to thank. Economists have repeatedly tested the idea that some investors choose shares more skillfully than others—after all, there are stars and dullards in most other walks of life. Yet the tests suggest that stock-picking skill is either rare or non-existent. An investor who has done well in the past is no more likely than the next one to beat the market in the future. To be sure, a few investors are repeatedly successful. But these sustained success stories are apparently no more common than chance alone would suggest.

For those who find capitalism distasteful, the news that markets are like lotteries proves that the system is rotten after all. Actually, there is no reason to be snooty about lotteries; despite popular prejudice, regular punters are no more likely to steal or neglect their responsibilities than anybody else. As for capitalism, the elusive quality of speculative riches proves not that markets are rotten, but rather the opposite. Markets price firms and assets so efficiently that it is extremely hard to be confident of outguessing them.

From The Economist’s “The Stock-Picking Fallacy,” August 8, 1992, p. 13.