You can't beat the market by buying good companies for the same reason you can’t get rich betting on the best football teams

The idea that information is “priced in” is a notoriously tricky concept for new investors (I know I struggled with it for a while), and it occurred to me that a sports betting analogy might help.

You can go out and bet on who is going to win tomorrow's NFL games, but for most of those games, there's a lot of information out there that leads people to expect that one team is more likely to win. Take, for example, tomorrow's Bills-Saints game. There's a lot of information suggesting that the Bills are a much better team, and are much more likely than the Saints to win. As a result, if you want to bet that the Bills will win, you're not going to find someone who will take the other side of that bet straight up.

To get someone to take the other side of the bet, you have to concede something: either give them better odds (ie they get a bigger payout if their unlikely bet pays off), or a spread, meaning a number of points that the favored team must win by for the bet to pay out (in this example, the Bills have to win by at least 15 tomorrow, if they win by 7, the people who bet on the Saints get the money). The expectation that the Bills are going to win is priced in, the odds or spread adjust until equal numbers of people are willing to take either side of the bet.

The stock market works the same way. There's a lot of information that leads people to expect that Apple will continue to grow and perform much better than the average company. As a result, to get someone to agree to sell you an Apple share, you have to pay a high price: 35 times Apple's current earnings per share (compared to an average of about 26.6 times for the US stock market as a whole). If everyone expects Apple to do better as a company than the market in general, the price of the stock will rise until there's an equal number of buyers and sellers. The expectation that Apple will have above average earnings in the future is already priced in, just like the expectation that the Bills will beat the Saints.

Everyone agrees the Bills will probably beat the Saints. To bet on it, you need to have an *even higher conviction* than the consensus. Everyone agrees Apple will probably have better earnings than the average company. To bet on it (ie buying Apple shares instead of a total market index fund), you have to have an *even higher conviction* than the consensus. You can't get rich betting on teams that everyone knows are good, and you can't beat the market buying companies that everyone knows are good. Available information is priced in.

Edit: I stopped watching football a while back, so the fact that the Bills are -14.5 vs the Saints is wild to me.

Edit2: If you think you have a method for finding mispriced stocks, that’s not necessarily in conflict with my point here. The point is that it’s more complicated than simply buying companies widely regarded as good, in contrast to what new investors often assume. (That said I do tend to be skeptical that retail investors can expect to find a market-beating strategy)

Edit 3: the Bills won 31-19, meaning that they won the game but did not cover the spread, and people who put money on the Saints won.