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I'm really pleased to say that I'm here with AQR's Cliff Asmas.
Cliff, thank you so much for joining this morning. Thanks for having me.
We have to start with your paper that caused quite a bit of a stir. Let me just read the title for our audience, the less efficient market hypothesis. Quite the claim for someone who studied under arguably the godfather Eugene Fama of the EMH. So what did you see that led you to believe this market is less efficient?
Sure, well, efficient markets in general, this idea that prices in some rational sense reflect all information.
That's the extreme version of that toothesis.
Gene tells the class, like third week of class, markets are assuredly not perfectly efficient, and you get a gasp. Because it's the University of Chicago. Everywhere else in the world they just go, yeah, we know that. But in Gene's class, that's a gas. So it begs the question, once you accept they're not perfect, how imperfect and does that change through times?
And I'm very clear about this in the paper. A lot of this is op ed.
It's my life experience in this business, but over my career. At the very beginning of my career, when we started AQR, eighteen of our first nineteen months were the blowoff top of the dot com bubbles, and we did a lot of things back then.
We were losing a lot of money. That was a bad part.
It wasn't statistically like beyond shocking, but it's not pleasant to happen in your first year and a half. And it turned out that the prices between cheap and expensive stocks in general, using a bunch of valuation measures, maybe they vary between six times more expensive to three times more expensive.
The expensive stocks.
They had shot up to like thirteen and they'd never been closed. It was fifty years of this and then this. So then you spend a lot of time saying, is there some way we're wrong?
Is there reason this is rational? And if you include know you stick with it.
Then if someone had said to me at that point, is this going to happen again in your career, I hopefully.
Would never say never.
No one in our field, your field, my field should ever say never about anything financial. But I think I would have said, oh yeah, probably not, almost definitely not, because it hadn't happened in fifty years my career is not going to be another fifty years.
I wish it were, but it's not going to be.
And if the question in your career presupposes you're still.
Here and you're not the only one, and.
You guys are probably in charge, So how's this going to happen again? And then even before COVID it was getting there, but COVID took that same differential and blew it out of the water the cliff.
I kind of argue, it'll play out the same as last time, that spreads will come back down, value will work again, and it's just we're in another one of these period.
That's exactly what we do, argue, So you are totally permitted to argue that. But the bigger question I'm trying to answer is I see this as a sign of the market getting less efficient about pricing. And in principle, we all think things should get more efficient over time. Technology marches on, data is more available, things that were available at a leg or available instantly now, but I think most of those things go to speed, not to
accurate price. It. Yeah, things get in prices faster, but I think there's strong evidence so.
Not just these two things, but these are the two major ones.
I experience that the crazy periods are getting crazier and lasting longer. So the next question to ask in the paper, and this is very speculative, I admit, is why why? And there are probably other great ones, but I focus on three, and I'll say I'm really fast sure. The first is the rise of passive. That's everyone's favorite. Passive is broken the market. I think that is probably part of it. No one knows how many people can actually be passive without breaking the market, but we know it's
not one hundred percent. That's a weird world where nobody is thinking about whether Nvidio is worth more than a candy story. So the idea that there would be less could weaken the tether to reality.
And I'll let you get to the other two because I find them really but justin in terms of that Quesially we're talking about Nvidia and this being a crazy period.
No quants know nothing about Indorce, so.
You know nothing about a single stock. I'm very aware of that. How crazy is this period?
We're still and I again I won't talk about Nvidia in particular, but when it comes to the spread between cheap and expensive stocks, we were at a new hundredth percentile in COVID. I jokingly called it one hundred and twentieth percentile, which from my math friends listening to you, there is no such thing. It's just a new hundredth, but it's about twenty percent above the prior hundredth.
We're back down to about the eightieth percentile spread versus history.
We still have a little bit of a tilt on, but far smaller than when it was one hundred and twenty. So I would say things are still out of whack, but it's not an arbitragy you can drive a truck through right now. But so I think passive as part of it. But it's very hard to know how much. The second one I'll do beyond quick post GFC ten fifteen years of super low interest rates, I don't think justifies these spreads, and we've written a lot about that.
But in a very non technical sense, may that drive investors mad and to do some crazy things?
Yes, that's all I'll say about that.
My third and favorite hypopnsis because it's so counterintuitive. Is I started out saying technology might make things faster, but not more accurate.
It might. In fact, I would.
Argue probably does contribute to the less accurate pricing, and in particular I'm talking about the melu of instant information free trading.
Certainly social media.
The dot com bubble was the first go round of kinna proto social media where you're.
A little too young for this one, but message boards were very hot.
People are all discussing their favorite e toys and doctorcoop.
Dot coms and.
If markets are efficient to some degree not perfect. The wisdom of crowds, the famous idea that a crowd can be more wise than the average component of the crowd, is a huge.
Part of it.
How much of your Twitter interactions color this because you're fair to talk to? I just you know, when you're talking to people who you don't agree with online, do some of that color? It's saying maybe this crowd isn't so wise.
I hope not. But but may it may it some may it sneak in.
I would have to admit it. Might it might it might sneak in. But if a wise crowd is the goal in a market, have we ever had a vehicle better than social media for turning a wise crowd into a dangerous mob?
And I'm not going to get political except I'm not.
Going to choose a political side. But if our politics are not a great example of this, I mean there was a point twenty years ago where we had utopian views with social media, that social media would make us all like each other more. I don't think I need to convince any of your viewers that that has not happened, and I think a lot of the same has creeped into markets.
It's unfair to choose the most crazy example.
But a poster child, not not not not a proof are the US meme stocks.
They have the most extreme example of.
What I'm talking about, crazy evaluations driven by social media. But life is not just them and everyone else. It's a point on a spectrum. So I do think markets have gotten someone less efficient. I think the final interesting question is what does that mean for a rational style of investing?
Can I ask you point out in your paper that it's a problem for society?
Why is it a problem for society?
Well, if you're actually going to read the paper, it's going to make this all take longer, you know that, right. It's a it's a problem for society, and I think I'll be a cheerleader for our industry. Quick seconds I don't know of enough people who think about it this way, but rational prices are very important to a free enterprise society when price is a whilely irrational prices are how we.
Allocate resources, and we do it in a very unproductive way.
If companies that are not very productive and are speculative and pie in the sky are are getting all the money, yeah, so it matters.
And let me finish with one thought, what does it mean?
Well, if markets are somewhat I don't say they're terrible less efficient.
Deviations from fair value We got ended there.
I'm so sorry.
Deviations from fair value will be bigger, last longer, but you'll.
Make more money from them.
You nailed it.
Thanks so much.
That was cliff astness of AQR over here at the Capitlar conference.