Breaking news. Apple just announced they will be releasing a new iPod that is slimmer, faster and all around destined to revolutionize the industry. This technology has never been seen before and it is assured that the company will flourish once this product is released. Furthermore you must be one of the first people on the planet to hear the news so you stand to gain a lot by investing now, right? So you go on your laptop, phone already ringing with your stock broker, and to your surprise, the price has already risen an astounding 10 percent. How could this be? The news was just released yet the price of the stock already reflects the news. Is it just that all traders in the market are trading based on insider trading information? This can’t be the case but it must considering the markets immediate reaction to breaking news. This is the level of efficiency we have reached in our technologically advanced society. No it is not because insider information is being used. It is because you are not competing with human traders, you are competing with computers. Well kind of. The largest investors and firms don’t watch the news and make decisions based on what they hear on what to invest in. This takes too long. If they were to practice this method they would miss out on the profits just like you did. What they do is they determine ahead of town what the correct decision is to make based on possible news that can be released. They then program this into a computer program to execute a trade based on that news. Let’s say for example Microsoft is releasing their earnings report 2 o’clock today. They have already programmed the proper trades to make based on whether the earnings report is positive or negative. Hence, if you read the earnings report and do your subsequent valuations and decide you should invest in the stock, these programs came to the same conclusion 5 minutes ago and thus executed the trade. Therefore, the price has already risen to match the valuation. So what does that mean to the everyday investor? Has market efficiency made it impossible to compete in the stock market? Yes and no. While we no longer have the opportunity to profit from idiosyncratic events in specific firms like we may have in the past we still have options to generate return. Obviously there is speculation–also known as professional gambling. I would not (nor would any knowledgeable individual) recommend this strategy since it bets on the direction a stock will move not based on news or trends but rather intuition. Where we can continue to generate return is through long term investments and mutual funds. Through long term investing we do not need to make trades based on breaking news events such as a new product or an earnings reports. We simply invest in reputable companies that generate consistent earnings and growth through the years. Mutual funds however directly face the issue of market efficiently. While most of us individuals lack the skills to create computer programs to make our trades for us, a mutual fund manager may have a strategy already in place. Thus you may stand to profit from news if involved in a fund. Regardless of how you try to pursue a return in the market you need to realize the current stock market is not the same as it was in the past. Technology has provided competitive advantages and as traders in the market we need to adapt to these changes.