But the very factor that causes market inefficiency -correlated beliefs -makes exploiting that inefficiency difficult. The desire to be part of the crowd is pow erful, and being apart from the crowd is scary for most

At that point, an uncle pulled him aside and offered some advice: "Jim, I wouldn't spend my time getting better; I'd spend my time finding weaker games." In other words, instead of finding players who are as skilled as you are, you want to find players who are not as good as you are and who are rich. That way, you have a better chance of walking ou... See more

Let me emphasise that the problem in investing is not a lack of skill -it is the exact opposite, there's too much skill. But the discussion also places the emphasis -properly -on the distribution of skill. And that has gotten narr ower virtually everywhere we look

. The idea is to index where the opportunities are modest and to seek skill where they are abundant

In plain language, it says that excess returns equal skill times opportunity. So, to make money, in poker or investing, you need skill but you also need opportunity.

We do know, for example, that the trading characteristics for stocks change after they have been added to an index such as t he S&P 500. But it remains to be seen whether indexing itself becomes a source of edge for active managers

The second dimension of skill is the crucial one -and that 's relative skill. You can imagine the skill of players falling along a bell -shaped distribution. The point is that the bell is getting skinnier in a lot of domains, which means that the difference between the very best and the average participant is less today than it was a generation or ... See more

Taking advantage of people who need to buy or sell for non -fundamental reasons

Let me make a couple quick final points on active share. The first is that active share has been in steady decline in the last 35 years. Active share in 1980 was around 80%, and it's down to about 55% today. That, o f course, excludes index funds and exchange -traded funds. So, more of the market today is hugging the benchmark than in the past