In “Reflections on the Efficient Market Hypothesis: 30 Years Later” (2005), B. Malkiel concludes with
the following passage:
The evidence is overwhelming that active equity management is […] a “loser’s game.” Switching from
security to security accomplishes nothing but to increase transactions costs and harm performance. Thus,
even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active
portfolio management. Both individual and institutional investors will be well served to employ indexing
for, at the very least, the core of their equity portfolio. […] And the most successful modern-day investor,
Warren Buffett, who has beaten the market over a prolonged period of time, sums up the advice in this
paper with characteristic wisdom: “Most investors, both institutional and individual, will find that the best
way to own common stocks (shares’) is through an index fund that charges minimal fees. Those following
this path are sure to beat the net results (after fees and expenses) of the great majority of investment
professionals.”
One of the arguments is the following graph of the percentage of EU-based actively managed funds
outperformed by MSCI Europe index (performance net of fees) for 3, 5 and 10 years ending 31st
December 2002 [the market and period are irrelevant, the numbers are very similar for 2010-2020)
Without focusing on whether W. Buffett is a proponent of the Efficient Market Hypothesis (he is not) or
whether the information is accurate (it is), carefully discuss the validity and strength of the argument
and its implications for the Efficient Market Hypothesis and what it entails for portfolio management.