There are two popular myths in financial markets that I would like to debug. The first is what is taught in finance programs at academic institutions around the world – namely, that active investors cannot consistently outperform the market because markets are efficient. The second is that lower interest rates should always lead to higher valuations or, conversely, that higher interest rates should always lead to lower valuations.
Academic studies using aggregated data show that funds that invest in concentrated portfolios and/or deviate significantly from benchmarks tend to outperform. Not every year, but on average in the long run. For example, in a 2005 Journal of Finance paper, Marcin Kacperczyk, Clemens Sialm and Lu Zheng found that the less diversified a fund was, the better it did. The outperformance resulted from selecting the right sectors or stocks, not from market timing. Moreover, in a 2009 Review of Financial Studies paper, Martijn Cremers and Antti Petajisto show that funds that deviated the most from benchmarks outperformed. And Sohnke Bartram and Mark Grinblatt published a paper in the Journal of Financial Economics in 2018 showing that prices do not reflect the most recent accounting statements, so one can earn risk-adjusted returns that are a result of fundamental analysis and taking advantage of market inefficiencies. Disaggregated data, too, show that many high-profile value investors have outperformed, on average, the market and/or their benchmarks over the long run. (Disaggregated data involve examining individual investors rather than large data bases that look at investors as a whol