The Less-Efficient Market Hypothesis by Cliff Asness

[Viking]

“Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion. I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons. I offer three hypotheses for why this has occurred, arguing that technologies such as social media are likely the biggest culprit. Looking ahead, investors willing to take the other side of these inefficiencies should rationally be rewarded with higher expected returns, but also greater risks. I conclude with some ideas to make rational, diversifying strategies easier to stick with amid a less-efficient market.”

 

For those with a little lime on their hands and interest in the topic you have two options:

• Read the paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4942046
• Listen to the podcast:

 

 

 

Edited November 24 by Viking

[Viking]

It blows me away the quality of material that is available today to help/educate small investors. And of course, education is one of the keys to unlocking a great life.
 

It is yet another example of how much better off we are today compared to when i was getting started back in the late 1980’s. Education opportunities are amazing (written/video). Cost have come way down (especially for those who do it on their own). Choices (broad based index funds) now allow small investors to outperform the majority of professional advisers without doing any work (that is nuts). Tax free/deferred accounts (also nuts). The end result is much higher after-tax returns. It’s like an incremental $500,000 just dropped on the lap of the average investor - versus what they would have earned if they were starting out 40 years ago.
 

But here is the really interesting thing. Most people will largely miss it. Like most things in life, with investing you get out of it what you put into it. You do have to put in the work early on - and get your infrastructure set up. And build the proper financial habits, like ‘live below your means’. But once you get that done, you can largely put things on autopilot (learning one or two new things each year as your personal situation changes). 

 

We really are living in a golden age for building wealth with financial assets. 
 

Of course, young people stand to benefit the most. Because they have the most time ahead of them (thank you compounding). But there are also enormous benefits for people in their 40’s, 50’s, 60’s etc. People living past 100 is a fast growing cohort… 

Edited November 24 by Viking

[james22]

13 minutes ago, Viking said:

It blows me away the quality of material that is available today to help/educate small investors. It is yet another example of how much better off we are today compared to when i was getting started back in the late 1980’s. Education opportunities are amazing (written/video). 
 

But here is the really interesting thing. Most people will largely miss it. Like most things in life, with investing you get out of it what you put into it. You do have to put in the work early on . . .

 

The great irony here is Asness opining on MSTR while admitting he's not done a deep dive on crypto.

 

LOL

 

Certainty is why most will largely miss it. 

[jfan]

thanks for highlighting this article. I read this paper when it came out and coupled with Mike Green/David Einhorn's thoughts on this structure , have been thinking about where the puck is going in the next couple decades.

 

I wonder if this is evolving into an age of conglomerates again. With small public businesses not getting any investor attention, it seems ripe for someone to consolidate them and control the cash flows in a private manner. Berkshire started this trend, and Fairfax is following, with increasing dollars allocated to private investments or take-private transactions. 

 

It is a bit of a conundrum wrt to the ease of accessing public investments at a low cost these days with more than plentiful information out there at our fingertips and the opportunity for decent future returns. The market structure seems to drive exponentially asset prices for those loved public equities and ignore everyone else. Coupled with the inherent laziness to actually do the work to understand what we are buying and owning, I feel people are just relying on the 1st order concept that "the market will return 7% indefinitely as they have in the past" which drives more market distortions. 

 

Investing is simple but not easy to do well.

[John Hjorth]

Anyone here in possesion of the original paper - the 1970 paper as pdf - by Eugene Fama?  I must have misplaced mine, because I can't find it. A share here would be much appreciated, thank you in advance.

[Spekulatius]

Just chiming in here:

 

[John Hjorth]

16 hours ago, John Hjorth said:

Anyone here in possesion of the original paper - the 1970 paper as pdf - by Eugene Fama?  I must have misplaced mine, because I can't find it. A share here would be much appreciated, thank you in advance.

 

Today, I tried again to find it, this time externally, not in my own storage, and I found it :

 

Eugene Fama : Efficient Capital Markets: A review of Theory and Empirical Work, 1970, attached.

Eugene Fama - Efficient Capital Markets - A Review of Theory and Empirical Work - 1970 - 20241125.pdf

[John Hjorth]

21 hours ago, Viking said:

... It is yet another example of how much better off we are today compared to when i was getting started back in the late 1980’s. Education opportunities are amazing (written/video). Cost have come way down (especially for those who do it on their own). Choices (broad based index funds) now allow small investors to outperform the majority of professional advisers without doing any work (that is nuts). ...  

 

... We really are living in a golden age for building wealth with financial assets. 
 

Of course, young people stand to benefit the most. Because they have the most time ahead of them (thank you compounding). But there are also enormous benefits for people in their 40’s, 50’s, 60’s etc. People living past 100 is a fast growing cohort… 

 

Lars [ @Viking ],

 

Off topic,

 

It's is true, and worthy a separate topic here on CoBF for separate discussion, perhaps called 'Democratization of Capitalism' or something like that. It's a trend, that to me appears to be overlooked here on CoBF, that has skipped almost everybodys attention, while it's strong, likely very strong. I'm not here talking about those certain meme stock phenomens, I'm talking about it in general.

 

I hope you're up for starting such new topic here on CoBF - at your own discretion with form etc. - for discussion! - Beause what you're doing personally already, is actually a part of the process!

[james22]

[Saluki]

I've always said that the short time horizon trades are hard to make money in because the algorithmic traders have supercomputers and strategies that involve nano seconds and the professional money managers have stuff that they think will outperform in the next few quarters.  So that short term time horizon is very crowded. Since they can't keep their job if they outperform for 2 years, then the stuff that takes longer to season is probably where the least amount of research, and the biggest gains should be.  Ted's 10x in 10 years in Dillards happened at the end of the time period.  

 

This is a weird thought, but humor me for a moment. When the printing press was invented, cities that had one were more likely to kill you for being a witch than cities that didn't.  Why?  Because false information spreads much faster than the truth.  So a short term strategy suffers from the amount of false information (noise) that dominates things like Twitter and TikTok. 

 

So the stuff with longer seasoning is probably also less likely to be the subject of eyeball grabbing fake news, and less likely to suffer from the reflexivity, as Soros puts it, of the negative news become believed and hurting your investment. 

 

FRPH has limestone quarries that are near valuable areas for residential development.  But they won't get them back until 2026, that's why the stock is cheap. Tobacco is shrinking, but vapes and Zyn are growing.  It's not enough to offset the loss in cigarette sales yet, but in a few years it might be, that's why they trade so cheap. Individual investors can wait that long, not many fund managers can. 

 

BABA and PDD react wildly to news from China or announcements from US politicians, because people are thinking 1 year out. If you think of them as something that will let you participate in the future growth of Chinese consumer spending, then the short term shouldn't matter.  Universal is using its own money to build theme parks for Nintendo. They won't be finished until 2026, but how many years has Disney made money from a theme park after it's opened? If this is a permanent flow of future funds, why aren't people looking at it?  Because it's more than 6-9 months out, so it may as well not exist for must fund managers. 

[Spooky]

Interesting topic thanks for sharing.

[DooDiligence]

2 hours ago, Saluki said:

I've always said that the short time horizon trades are hard to make money in because the algorithmic traders have supercomputers and strategies that involve nano seconds and the professional money managers have stuff that they think will outperform in the next few quarters.  So that short term time horizon is very crowded. Since they can't keep their job if they outperform for 2 years, then the stuff that takes longer to season is probably where the least amount of research, and the biggest gains should be.  Ted's 10x in 10 years in Dillards happened at the end of the time period.  

 

This is a weird thought, but humor me for a moment. When the printing press was invented, cities that had one were more likely to kill you for being a witch than cities that didn't.  Why?  Because false information spreads much faster than the truth.  So a short term strategy suffers from the amount of false information (noise) that dominates things like Twitter and TikTok. 

 

So the stuff with longer seasoning is probably also less likely to be the subject of eyeball grabbing fake news, and less likely to suffer from the reflexivity, as Soros puts it, of the negative news become believed and hurting your investment. 

 

FRPH has limestone quarries that are near valuable areas for residential development.  But they won't get them back until 2026, that's why the stock is cheap. Tobacco is shrinking, but vapes and Zyn are growing.  It's not enough to offset the loss in cigarette sales yet, but in a few years it might be, that's why they trade so cheap. Individual investors can wait that long, not many fund managers can. 

 

BABA and PDD react wildly to news from China or announcements from US politicians, because people are thinking 1 year out. If you think of them as something that will let you participate in the future growth of Chinese consumer spending, then the short term shouldn't matter.  Universal is using its own money to build theme parks for Nintendo. They won't be finished until 2026, but how many years has Disney made money from a theme park after it's opened? If this is a permanent flow of future funds, why aren't people looking at it?  Because it's more than 6-9 months out, so it may as well not exist for must fund managers. 

 

If it weighs more than a duck, just own it