Earlier in the year, Eugene Fama, an American economist, won the Nobel Prize of Economics (along with Robert Schiller and Lars Peter Hansen). His contribution to “the dismal science” (a rather unfair term coined by the Victorian Historian Thomas Carlyle) that earned him the award was the development of the Efficient Market Hypothesis (EMH).

The EMH is a relatively simple theory that has gone on to form the bedrock of much of modern portfolio theory, and consequently the fund management industry itself. There are three versions of the theory, each with ever increasingly improbable assumptions but the semi-strong form, which is most widely regarded to be a fair reflection of reality, stipulates that the only way to beat the market is to possess material, non-public information, or insider trading to me and you.

This is because stock prices react instantly to changes in fundamentals and past price information, and therefore follow what is known as a random walk, and are impossible to predict. The theory led to the development of all the passive strategies (ETFs and trackers) that have revolutionised today’s markets and has changed the way many people invest.

Now, thank you for bearing with me so far but I’m sure some of you are scratching your heads thinking the above doesn’t quite hold true; after all, I’m sure many of you can name fund managers who have beaten the market consistently over a number of years. In fact, there are countless instances where the EMH doesn’t hold up well under scrutiny, but one striking example was the US stock market crash on October 19th 1987, now known as Black Monday.

At one stage during the trading day the S&P futures were down a whopping 29%! Now, if the EMH were to hold true, the chances of this happening are around 10-160 or, to give you a visual example, there is more chance of someone picking one atom out of the whole universe, and then another person repeating the process and picking the exact same atom.

The point I’m making here is that markets aren’t always efficient (although the example given is an extreme case), and this will present active fund managers with a steady stream of opportunities to beat the market.

In my opinion, one of the most common and long-lived strategies that beats the market over the medium to long-term is value investing. After all, one thing I have learned in my nearly 20 years of experience is that if you buy something cheap, you stand a decent chance of making money.

This theory is broadly accepted by the investment community, but why then haven’t other market participants moved in and arbitraged this opportunity away? Well, there are many theories as to why this may be the case, but I attended a meeting with a value fund manager who thinks the answer lies in human psychology.

In short, he says he buys stocks which others “can’t, won’t or don’t” or simply don’t have the stomach for. Perhaps it is the fear of buying a down-and-out company and it then going bust, or the feeling of safety of travelling with the herd which means many participants ignore the long-term evidence that value investing works.

All I know is that human nature is not going to change over night, which means this market anomaly is likely to persist and value fund managers who can implement their strategy with discipline, skill and patience (as the style sometimes falls out of fashion) should continue to flourish over the long term.

In summary, I’m not trying to say it is easy to beat the market. It’s not. And it is almost as hard to find a fund manager who can do it on a consistent basis. But as I’ve described above, opportunities do present themselves, and some, like value investing, may be around for a long time to come.

Darius McDermott is managing director of Chelsea Financial Services