It isn’t your imagination. The stock market really is getting crazier – at least, according to one of the investment industry’s most prominent number crunchers.
This is a bit like the pope conceding that the heathens have a point. For more than a half century, finance professors and educated investors have worshipped at the altar of the efficient market hypothesis . This is the idea that stock markets are reliable and rational judges of value. If Mr. Asness is correct that markets are becoming less efficient, the implications are profound for these investing strategies. He acknowledges, though, that market efficiency is difficult to measure and that his concerns may be “the harrumphing of an old man.”
This willingness to pay through the nose signals exuberance. It may even indicate a bubble: The value spread spiked around 1999 to 2000 during the dot-com mania. It did so again around 2020, when the COVID-19 pandemic disrupted markets and helped meme stocks of low quality, near-bankrupt companies briefly soar before crashing.
Mr. Asness argues this top-heavy structure cannot be explained simply as the result of a boom in a handful of technology stocks. The phenomenon seems rooted in something more structural. It’s an excellent question and one that leads on to an even more intriguing puzzle: What can a rational investor do in a market that is showing signs of increasing irrationality?
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