Who are the world’s best investors?

IF FINANCE has a single rule, it is that arbitrage should keep prices in line. If they do stray from fundamentals, so the argument goes, savvy investors should step in to correct them.

All good in theory. In practice, less so. Markets can be swept by sentiment, detaching valuations from fundamentals. Economists have surgically documented persistent distortions. Purely mechanical flows, for instance, move markets even when they are known to investors in advance and unrelated to earnings prospects.

When a stock is added to an index, its price inflates. Predictable dividend reinvestments also push up prices. Why does this happen? And who, in time, might correct the market?