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.