Baked in the Cake

Stock pickers don't realize that virtually all of the information and forecasts about a stock, a sector, or an economy is quickly digested by the totality of market participants and swiftly embedded into the price. This market efficiency ensures that prices agreed upon between willing buyers and willing sellers are the best estimate of fair market values. As illustrated in the previous painting, available information and news is "baked in the cake," and no one has special knowledge that is not already included in the price, except for inside information (which is illegal). No single trader can know more or have a consistent advantage over the millions of other market participants around the world. Markets reward investors, not speculators.

Baked in the Cake
Baked in the Cake

Tenets of market efficiency do not state that prices are perfect or that at any given time there are no mispriced securities in the marketplace. Rather, these tenets assert that because prices reflect all known information, mispriced securities cannot be identified in advance.

Step 3Stock Pickers