In his latest paper titled – The Less-Efficient Market Hypothesis, Cliff Asness explains why he believes markets have become less efficient over the past 34 years due to technology, gamified trading, and social media.
This inefficiency raises the stakes for rational active investing, with bigger and longer-lasting market swings. Investors should embrace this opportunity but remain cautious of strategies that might not perform well long-term.
Asness stresses the importance of sticking with sound investment principles despite volatility. While indexing is a reasonable choice for some, active value and quality stock picking may offer better opportunities.
Here’s an excerpt from the paper:
I believe markets have gotten less efficient over the 34 years since the data in my dissertation ended. I believe it’s likely happened for multiple reasons but technology, gamified 24/7 trading on your phone, and social media in particular are the biggest culprits.
Whether this lasts forever I can’t say. It seems that over history new technologies are eventually adapted to, and one day maybe that adaptation renders this piece obsolete. But for now, I think it has raised the stakes of rational active investing.
I think the ups and downs will be bigger and last longer, making more money for those who can stick with it long term, but making it harder to do so. That seems fair to me. I think some investors should lean into it taking advantage of this larger opportunity than in the past, and hopefully some of my suggestions for doing so at least help.
I think indexing is a perfectly reasonable option for those who know they can’t do it. I think assets that simply launder these risks for you are not the answer; rather they are a potential drag on their legion of believers going forward as a bug you get paid for bearing becomes a feature you pay to enjoy.
Do not think you can hide from volatility. It either finds you very painfully eventually or you pay too dearly for the fake smoothness along the way. Don’t trade the wrong direction on 3-5 year results. Don’t be fooled by valuation changes, even over some very long periods, into throwing away what’s right.
Don’t over-focus on line items, particularly small ones that are diversifying – they are there to do well long term but they won’t always, and you need to keep perspective and remember why they are there.
Smart investors worry about good strategies getting arbitraged away. That is, too many people are doing them, so going forward they will not look as good as their presumably attractive past. I think old-school active value and quality stock picking has seen the opposite occur.
We should all look to fade strategies that have been arbitraged down and feed strategies that have been starved for capital.
Remember, efficient markets matter. They matter for society’s allocation of resources and bubbles misallocate resources. The advice in this piece is meant to make your investing life better, not a charitable service to society. But you are allowed to be gratified that you are doing both.
Good investing has always been a challenge combining a) discerning what is right, and b) sticking with what is right. Both have always been vital and both still are. But if markets are indeed “less efficient” the first task has actually gotten easier and the second harder — and the skills needed to pursue good investing have shifted. That tells us what we should work on going forward. Good luck!
You can find the entire paper here:
The Less-Efficient Market Hypothesis – Cliff Asness
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