Traditional theory holds that stock prices reflect fundamental value, adjusting efficiently as rational investors incorporate new information. But recent research by Ralph Koijen and others turns this view on its head. Their findings reveal that markets are far more sensitive to shifts in investor demand than standard models predict—and retail investors play a much bigger role than previously assumed.

In theory, buying 1 per cent of a stock should move the price by just 0.02 per cent. In reality, Koijen shows it moves by roughly 1 per cent—a 5,000-fold difference. The reason? Demand is far more inelastic than standard models assume. And when Koijen examines who is actually driving this volatility, he finds that retail investors and smaller institutions—not large institutions—are the key contributors to cross-sectional price movements.

This inelasticity has profound implications. Prices can deviate significantly from fundamentals for prolonged periods, and arbitrage is often too constrained to correct them quickly. The result is a market that may remain efficient over the long run—but behaves far more irrationally, noisily, and sentimentally in the short term than traditional finance theory would suggest.

It’s tempting to think that rising stock prices reflect improving fundamentals—stronger earnings or higher dividends. But research by John Cochrane and John Y. Campbell suggests otherwise: most price movements are driven not by changes in expected cash flows, but by changes in expected returns.

If dividends are relatively stable but prices are volatile, the discount rate must be moving. In other words, prices often rise because investors are willing to accept lower returns for holding stocks.

This helps explain why valuation ratios like the price-dividend ratio tend to predict long-term returns—not dividend growth. When prices are high relative to dividends, future returns are typically lower.

The implication is clear: expected returns vary over time, and valuation matters. But whilst these signals can inform long-term asset allocation, they’re noisy and best used cautiously.

Eugene Fama’s Efficient Market Hypothesis (EMH) is often misrepresented. Far from claiming that markets are always right, Fama argues that whilst markets aren’t perfectly efficient, they’re efficient enough that consistently beating them is extremely difficult.

He outlines three forms of efficiency—weak, semi-strong, and strong—based on how much information is reflected in prices. Whilst evidence supports the weaker forms, Fama himself rejects the strong form that assumes insider information is priced in.

For Fama, EMH is a useful framework, not a flawless rule. Prices can be wrong—but not in ways that investors can reliably exploit.

Growth stocks sound like the perfect match for aggressive, long-term investors—offering high return potential, long horizons, and exciting prospects. But beneath the surface lies a more complex story. Growth and value stocks respond differently to changing economic conditions, and understanding these differences is crucial to building a resilient portfolio.

This post explores why growth stocks are more sensitive to changes in the discount rate, whilst value stocks are more exposed to changes in expected cash flows. We examine the deeper implications of ‘good beta’ and ‘bad beta’—concepts developed by John Y. Campbell and Tuomo Vuolteenaho—and how they influence the real-world risks investors face. Finally, we turn to lifecycle investing: why young investors with risky jobs may benefit from growth, and why older investors might tilt towards value. The result is a more nuanced framework for asset allocation—one that considers not just age or return potential, but how your investments interact with your income, career, and future opportunities.