For me, a good book is one that speaks to something important and that causes me to think differently and more clearly about the chosen topic. My AQR colleague Lasse Pedersen has written just such a book, Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. (Full disclosure: he extols me as one of many, along with our competitors.) From now on, there are two kinds of investors: the efficiently inefficient ones and the merely inefficient ones who didn’t read this book.
The idea that corporate management should focus on maximizing shareholder value is under attack, often in hyperbolic terms, with this idea blamed for great and varied harm (e.g., underinvestment, inefficiency, inequality and the failure of people to appreciate the film Ishtar). Recently, James Montier of the esteemed, including by me, money manager Grantham, Mayo, Van Otterloo & Co., voicing the views of many, wrote a piece calling it “The World’s Dumbest Idea.” Luckily for markets and the economy, this is not the world’s dumbest idea — not close. It’s imperfect, as all things are, but it’s not even a little bit “dumb.”
Financial theory has taken a lot of abuse recently, specifically some of the basic tenets of modern portfolio theory. A fair chunk of the abuse comes from our industry’s collective tendency to judge ideas over relatively short periods. Thus, it’s important to occasionally step back and note that when examined properly, the very basics hold up better than many think or sometimes casually assert.
Cliff argues that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past. He focuses on classic “factor”-type strategies, things like value, momentum, carry and quality/defensive.
The recent Sanford Bernstein research note calling indexing “worse than Marxism,” created quite the kerfuffle. In my Bloomberg op-ed article, I discuss how the Bernstein note, while perhaps kick-starting some valuable discussions in the world of finance, missed, or at least minimized, something much more important — free riding on price signals is not a bug of Capitalism to be exploited by “greedy red indexers,” but instead may be the most important feature of Capitalism.
A recent interview with Professor Eugene Fama represents another sign that much confusion about momentum unfortunately remains. While my faith in Professor Fama is exceptionally high, this is one of the few topics where we fundamentally disagree. While debates and discussions about momentum will undoubtedly continue, in this post I’ve tried to sort out fact from fiction by bringing clarity regarding the facts and interpretations about momentum and debunk some myths along the way.