Featured and Latest Posts
Is Factor Investing Worthwhile Pursuing? Practically speaking?
Factor investing promises a scientific edge—systematic returns from tilting towards characteristics like value, size, or momentum. But that promise is under review. Economist Andrew Chen, co-creator of the Open Source Asset Pricing project, casts doubt on the viability of many factors, especially for retail investors.
Chen argues that much of the language around ‘factors’ is imprecise. Many so-called factors are merely statistical predictors, not true sources of systematic return. Even when predictors are statistically sound, their effectiveness often fades after publication—and real-world trading costs can erase any remaining edge.
The takeaway? Whilst a small number of robust, low-cost, multi-factor strategies—like those from Dimensional, AQR, or Vanguard—may still offer modest rewards, the broader field of factor investing appears less fertile than it once seemed. For most investors, the global market index remains a formidable benchmark.
Who Really Determines Stock Prices? The Surprising Influence of Retail Investors
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.
Can Active Fund Managers Protect the Downside?
Active managers often claim that they earn their keep in downturns—sidestepping crashes, rotating into resilient sectors, or holding cash whilst passive investors suffer. But when we test that promise across the bear markets of 2000–2002, 2008, 2011, 2018, 2020 and 2022, the data tell a different story.
Using SPIVA scorecards and academic research from Cochrane, Blake, Barras and others, this post shows that active fund managers not only fail to protect on the downside—they often underperform more severely. Across US style boxes and global markets, the pattern is consistent: the ‘safe hands’ of active management rarely deliver when it matters most.
If you're relying on stockpickers for crisis protection, it may be time to rethink that strategy.
Can Stock Returns Be Predicted? Cochrane, Campbell, and the Case for Time-Varying Discount Rates
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.
Good financial decisions aren’t about predicting the future—they’re about following a sound process today.
In investing, outcomes are noisy. Short-term performance often reflects randomness, not skill. Yet fund managers continue to pitch five-year track records as if they prove anything. They don’t.
As Ken French puts it, a five-year chart ‘tells you nothing’. The real skill lies in filtering out the noise—evaluating strategy, incentives, costs, and behavioural fit.
Don’t chase what worked recently. Stick with what works reliably.