How To Profit From Loopholes In The Efficient Market

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I'm a reporter on Forbes' money team covering investing trends and Wall Street's difference-makers. I've reported on the world's billionaires for Forbes' wealth team and was previously an assistant editor covering money and markets.

Stock picker Ken Farsalas at Oberweis Asset Management is proving that the best way to trounce index funds is to fill your portfolio up with little known, earnings-beating companies.ugene Fama, University of Chicago economist and father of the efficient market hypothesis, has long been a thorn in the side of active stock managers. His Nobel Prize-winning research dating back to 1970 argues that stock prices reflect all available information and are therefore fairly priced.

“Investors tend to cling to preconceived beliefs and notions and disregard new information that shows up in an earnings surprise,” says Ken Farsalas, 52, lead portfolio manager and director of U.S. equities at Oberweis. “Investors are guilty of anchoring bias, confirmation bias, commitment bias, herding bias, groupthink–all of these different biases come into play. They mess with investors’ ability to make effective decisions.

Oberweis Asset Management was founded in 1989 by Oberweis Sr., a former teacher and stockbroker who began publishing a stock newsletter,in 1976. In 2001, Oberweis Sr. went into Illinois politics and son Jim W. took over. Initially the firm’s approach followed what it called the “Oberweis Octagon,” investing in stocks with sales and earnings growth of at least 30% in the most recent quarter, among other metrics. Then, beginning in 2015, Oberweis handed the reins of the U.S.

Recently Farsalas has been finding earnings surprise stocks in the semiconductor business. Take the case of, a $4 billion company which specializes in ion implantation, a key part of chip manufacturing. In the third quarter of 2019, the Beverly, Massachusetts company reported earnings of two cents per share to beat consensus analyst expectations of a one-cent loss per share, with new bookings accelerating.

Tech stocks make up 22% of Oberweis’ small cap fund and 29% of its micro-cap fund and have helped drive its strong returns, but the firm also has large exposure to healthcare and industrials, not always mainstays in a growth stock portfolio. In February, Oberweis invested in school bus manufacturer, one of the top five holdings in its micro-cap fund as of the end of June.

Despite micro-caps’ notorious volatility, this approach has helped Farsalas avoid steep drawdowns like many growth investors suffered through last year. His micro-cap fund fell 10.4% in 2022, preserving most of its 54% gain from 2021, while the Russell 2000 Micro-Cap Growth Index plummeted 30% last year after only gaining 1% in 2021. Performance numbers for Oberweis’ small-cap fund were similar.

 

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