You've probably heard the tale about the investor and the University of Chicago economist walking down the street. The investor sees a $100 bill lying on the pavement and goes to pick it up. The economist says, "Don't bother. If it were really there, someone would have already grabbed it."

Denying facts doesn't make them any less true, and ignoring opportunity doesn't mean it doesn't exist. Yet such denials are the underpinnings for one of the most popular investment theories of the past half-century: the efficient market hypothesis (EMH). To wit, that it is impossible to beat the market because a stock's price already reflects all relevant information.

Factions within the financial industry have successfully spread the EMH gospel by extolling the virtues of diversification as a safety net to protect investors from themselves. Never mind that some managers and investors beat the market. Value investing is an "anomaly," according to EMH advocates. They insist safety lies in diversification, best achieved with index funds, ETFs, baskets of funds and hundreds of other packaged products from Wall Street factories. Absolute faith in efficient markets convinced millions of investors to buy manufactured products that would allow them to index the markets instead of individual stocks.

These products seemed a perfect cure to an investing public reeling from the churning markets of the 1990's, when high-flying IPOs and billion-dollar startups created a Wall Street environment that discouraged fundamental portfolio discipline. Millions of investors abandoned basic diversification in favor of speculation. Why diversify when tech stocks were doubling, splitting and doubling again?

For the hordes of investors who overreacted and chose to abandon individual stock ownership in favor of index funds, the cure has proven to be as bad as the illness. Over the last decade, they have seen profits in their portfolios soar, only to give it all back. While diversification has its advantages, what torpedoed investor portfolios over these past years was over-diversification, fueled by unquestioned acceptance of a hypothesis rooted in products versus personal judgment. Investors who bought into the cult of market efficiency got exactly what they asked for: full-blown diversification and a shellacking of the same proportions.

Wall Street firms are clear proponents of index funds, having earned billions in fees building and running them. But just because a financial product racks up impressive sales figures and has millions of investors doesn't necessarily mean it works. As long as these funds make money for the big brokerage houses, they will continue to proliferate.

Fee income is not the only element that has fueled indexing mania. Wall Street's unremitting effort to loosen the bond between advisor and client has been well served by the trend away from value investing and individual stock ownership. The mantra of market efficiency has served as a powerful crowbar in that pursuit.

The concept of value investing implies that some advisors and investors can do better than others because of their ability to pick stocks. True value investors have little interest in mutual funds. Value investors are looking for isolated values and inefficiencies and are disinclined to buy packaged products. The belief that some advisors are superior stock pickers serves to strengthen loyalty between investors and their advisors.

In short, inefficient markets favor the advisor.

Wall Street would prefer to have the investing public believe that the market has already priced in every possible piece of information so investors and their advisors cannot expect to do any better.