Why No One Can Explain a Price

Friedrich Hayek's insight was that the knowledge an economy runs on is scattered. It lives in millions of separate heads, most of it never written down, and no one holds more than a fragment. A price is what compresses all of it into a single number. The price of strawberries tells you they are scarce this week and you should buy fewer. It does not tell you whether there was a frost in Oxnard, a strike at the packing plant, or a change in what people feel like eating.

John Cochrane of the Hoover Institution put it this way in August 2026, declining to explain a surge in long-term interest rates: "Hayek taught us that if we knew why strawberry prices go up and down, let alone interest rates, communism would have worked."

The argument is compact. If anyone could reliably work out why a price moved, that person would possess the knowledge a central planner would need, and central planning would have succeeded. It did not. So nobody has that knowledge, and nobody can decode a price after the fact, let alone before it.

This is a stronger claim than the familiar one that markets are hard to predict. It says the explanations offered every day for why the market rose or fell are reconstructions, not findings. They are stories told after the outcome is known. The market does not publish its reasoning.

Which is why we do not build portfolios around a view of why prices are where they are. We build them around the fact that prices already contain what is known, and that what moves them next is by definition what nobody saw coming.

Is it Possible to Beat an Efficient Market?

Active investment managers encourage the idea that the market can be beaten with superior market-timing and security selection skills. This notion appeals to investors who believe that it is possible to  achieve better results by selecting the best money manager. The financial press supports this idea with a never-ending supply of articles on the best stocks, strategies, funds, and forecasts. The message is always the same: don’t settle for ordinary results. Aim high and beat the market!

Now let’s peek inside the investment profession. Here you’ll find many bright, talented people who love the high stakes and potential high rewards of investing. It’s no wonder that some of each generation’s greatest analytical minds are drawn to investment research. Ironically, the intelligence and skill of these competitive professionals makes the probability for break-out success quite low.

Imagine a single securities transaction. The buyer has concluded that the security is worth more than cash, while the seller has concluded that cash is worth more than the security. Each has carefully evaluated all publicly available information concerning the stock, and yet managed to reach opposite conclusions. At the moment of the trade, both parties are acting from a position of informed conviction, even though time will prove one of them right and the other wrong.

For instance, one investor may believe an excellent earnings report from Apple makes the stock a buy; another may feel that the stock has nowhere to go but down the following quarter. This example is repeated millions of times daily in markets around the world. Stock picking experts and research analysts compete aggressively to find stocks they believe to be over- or under-valued to trade for profit. But in open, free, and competitive security markets, their transaction price is a consensus of a security’s intrinsic value. This is the nature of an “efficient market.” And in an efficient market it is difficult to imagine that a security’s market price will depart meaningfully from its true underlying value.

The efficient markets hypothesis (EMH) is the organizing principle for understanding how markets work and what investors should care about. The idea of efficient markets is so natural that it's probably been with us for centuries, Robert Schiller writes in "Irrational Exuberance" (Broadway Books, 2000). The term first became widely known through the work of Professor Eugene F. Fama of the University of Chicago. Fama and his colleagues performed extensive research on stock price patterns in the late 1960s and published a paper reviewing the theoretical and empirical literature on the efficient markets model (Efficient Capital Markets, The Journal of Finance, Vol. 25, No. 2, May 1970). The paper asserts the following:

In other words, an efficient market incorporates relevant known information as well a consensus expectation regarding the unknown into current security prices. The most important premise of the efficient market is not that new information is disseminated rapidly, but that not all traders translate new information in the same way. If new information is the main driver of prices, only unexpected events will trigger price changes. This may be one reason that stock prices seem to behave randomly over the short term.

No matter how powerful a trader’s analytical tools, or how sophisticated their understanding of the industries they study, or how deep their knowledge of consumer and market trends, the fact remains that it is virtually impossible for traders to reliably beat the market by gathering and analyzing information. It follows then, that most active money managers, with their associated direct and indirect transaction costs, will underperform the market over time.

If professionals with virtually unlimited resources cannot apply research and analysis to pick winning stocks, it is even less likely that individuals can outperform the market. The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk.

Market efficiency does not rule out the possibility that some money managers will earn above-normal returns. Over any period of time, some investors will beat the market, but the number of investors who do so will be no greater than expected by chance, and any effort to beat the market comes with added risk.

Without realizing this, many investors continue to compare their performance against the results achieved by the latest investment superstar. These misguided investors chase performance by constantly reallocating money from one manager to another. They are always in the hunt for the elusive portfolio manager who can produce the same superior performance tomorrow that they did for someone else yesterday. Even in rare situations where a money management organization has a unique proprietary insight that produces a superior result, the expectation is that the advantage will be eroded over time as other money management organizations discover and exploit the process.

The tremendous growth in the use of index funds serves as tangible evidence that money management today is being transformed, moving away from attempts at market timing and stock selection to the more important principles of asset allocation and diversification. Rather than trying to out-research other market participants, passively-managed index fund portfolio managers like Cardiff Park Advisors look to asset class diversification to manage uncertainty and position portfolios for long-term growth. The goal is not to beat the market but to devise appropriate long-term strategies that will move investors toward their financial goals with the least amount of risk. These strategies do not fight the capital markets so much as they intelligently ride with them.

Learn More About Us

Cardiff Park Advisors is located in San Marcos, 25 miles north of San Diego. We work with clients throughout the United States. We welcome the opportunity to discuss your financial goals and how we can help you reach them. You may reach us by emailing our principal at jgorlow@cardiffpark.com or calling our office at 760-635-7526.

For more information about Cardiff Park Advisors please review our brochure at https://adviserinfo.sec.gov/firm/summary/126752 or visit www.cardiffpark.com