How To Profit From Loopholes In The Efficient Market

Stock picker Ken Farsalas at Oberweis Asset Management is proving that the best way to trounce index funds is to fill your portfolio up with little known, earnings-beating companies.

_{By Hank Tucker, Forbes Staff}

Eugene Fama, University of Chicago economist and father of the efficient market hypothesis, has long been a thorn in the side of active stock managers. His Nobel Prize-winning research dating back to 1970 argues that stock prices reflect all available information and are therefore fairly priced. In other words, trying to beat the market is futile over the long term.

However, even Fama has trouble explaining one disturbing pattern. In a 1998 paper in the Journal of Financial Economics, he addressed the phenomenon that stock prices continue to move up or down in the direction of an earnings surprise for as much as a year, describing it as the “granddaddy of under-reaction events.”