While many argue that outperformance by one or more participants in a market signifies an inefficient market, it's important to recognize that successful active managers should be evaluated in the context of all participants. Its difficult in many cases to determine whether outperformance can be attributed to skill as opposed to luck. However, the challenge is to identify an outperformer before the fact, rather than in hindsight. Additionally, in many cases, strong performers in one period frequently turn around and underperform in subsequent periods. A substantial number of studies have found little or no correlation between strong performers from one period to the next.
Market efficiency is a description of how prices in competitive markets respond to new information.
The instant the lamb chop hits the water, there is turmoil as the fish devour the meat. Very soon the meat is gone, leaving only the worthless bone behind, and the water returns to normal. Similarly, when new information reaches a competitive market there is much turmoil as investors buy and sell securities in response to the news, causing prices to change. Once prices adjust, all that is left of the information is the worthless bone. No amount of gnawing on the bone will yield any more meat, and no further study of old information will yield any more valuable intelligence.