Europe’s top strategist has weighed into the debate about efficient markets.
Soc Gen’s James Montier wants Efficient Markets Hypothesis (EMH) and all its offshoots consigned to the dustbin of history before they inflict any more damage on investors.
Montier’s charge sheet is a lengthy one. He says EMH has left us with a long list of bad ideas that have influenced the investment industry. These include an obsession with benchmarking, the capital asset pricing model, risk management etc…
This approach has also given rise to the obsession with benchmarking, and indeed a new species, Homo Ovinus whose only concern is where they stand relative to the rest of the crowd, the living embodiment of Keynes edictThat it is better for reputation to fail conventionally, than succeed unconventionally.
The EMH also lies at the heart of risk management, option pricing theory, and the dividend and capital structure irrelevance theorems of Modigliani and Miller, and the concept of shareholder value, all of which have inflicted serious damage upon investors. However, the most insidious aspects of the EMH are the advice it offers as to the sources of outperformance. The first is inside information, which is, of course, illegal. The second, is that to outperform you need to forecast the future better than everyone else. This has sent the investment industry on a wild goose chase for decades.
Of course, Montier is pushing at something of an open door, as the FT’s Gillian Tett reported this week.
The British CFA recently asked members for the first time whether they trusted in “market efficiency” – and discovered more than two-thirds of respon-dents no longer believed market prices reflect all available information. More startling, 77 per cent of the group “strongly” or “very strongly” disagreed that investors behaved “rationally” – in apparent defiance of the “wisdom of crowds” idea that has driven investment theory
As luck would have it, Montier is scheduled to speak at the UK’s annual CFA conference in London on Thursday. And the title of his speech? The Dead Parrot of Finance.
Here’s a taster.
Given that this is the UK division of the CFA I am sure that The Monty Python Dead Parrot Sketch will be familiar to all of you. The EMH is the financial equivalent of the Dead Parrot. I feel like the John Cleese character (an exceedingly annoyed customer who recently purchased a parrot) returning to the petshop to berate the owner.
Related links:
A suckers’ rally or the real deal? - FT Alphaville
A summer reading list – Long Room
The coming oil-equity disconnect or the end of efficient markets theory? – FT Alphaville
