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A weekly reality check on sensible investing and financial decision-making for Canadians. Hosted by Benjamin Felix and Cameron Passmore.

Jan 13, 2022

While there is certainly room for rigorous debate regarding market efficiency versus inefficiency, there are many who dismiss Eugene Fama’s Efficient Market Hypothesis (EMH) as an incorrect model without understanding what the implications are or how to test it. In today’s episode of the Rational Reminder Podcast, we tackle some common market efficiency myths and misconceptions using Fama’s 1970 paper on EMH as well as supporting papers by Kenneth French, Lubos Pastor, José Scheinkman, and many others. You’ll also hear about behavioural finance, quantitative investing, human bias, and momentum as they relate to market efficiency before debunking some anecdotal misconceptions about EMH involving Warren Buffet and Renaissance Technologies. In addition to our fascinating main topic for today, you’ll get a glimpse into the four waves of a career in Cameron’s review of The Long Game by Dorie Clark and Benjamin shares some notes and corrections regarding the user cost model from Episode 180: Is Canada Really in a Housing Bubble? We also discuss housing as a depreciating asset, innovation stocks in deep value territory, and the size of innovation platforms relative to global market cap and what that means for investors, plus a whole lot more. Make sure not to miss this jam-packed episode for everything you need to know (and forget) about market efficiency!


Key Points From This Episode:


  • Kicking off with a book review of The Long Game by Dorie Clark. [0:10:53]
  • Four waves of a career as per Dorie Clark: learning, creation, connecting, reaping. [0:13:04]
  • Benjamin readdresses the user cost model from Episode 180 on the Canadian housing bubble (or lack thereof). [0:16:06]
  • Insights from the user cost model regarding price sensitivity and rate changes. [0:20:13]
  • Addressing common confusion regarding housing as a depreciating asset. [0:22:53]
  • Speaking of bubbles: innovation stocks in deep value territory as per Cathie Wood. [0:26:08]
  • ARK’s forecast for innovation platforms and the 30-40 percent compound annual rate of return their strategies could deliver in five years. [0:32:01]
  • What deep value looks like according to ARK; prices to book, sale, and earnings. [0:33:30]
  • Thoughts on the size of innovation platforms relative to global market cap. [0:34:47]
  • Why growth in earnings per share, not market cap, results in growth in returns. [0:36:14]
  • The impetus for today’s topic: Market Efficiency Myths and Misconceptions. [0:40:03]
  • Eugene Fama’ himself on why the market isn’t expected to be perfectly efficient. [0:41:44]
  • Testing market efficiency categorized by weak, semi-strong, and strong forms. [0:42:29]
  • Why applied micro-economist and market design specialist Eric Budish believes the market is objectively inefficient at the millisecond horizon. [0:43:35]
  • What EMH has to say about information markets, competition, and actual prices. [0:45:11]
  • Some ways to test market efficiency taking different models into consideration. [0:47:22]
  • Understanding what EMH does not say, including that prices are right at all times. [0:50:43]
  • Alternative models to EMH; behavioural finance as explained by Professor Hersh Shefrin in Episode 167. [0:53:18]
  • What Wes Gray says about quantitative investing and human bias in Episode 69. [0:59:09]
  • Market efficiency and given anomaly: seasonality, momentum, and more. [1:02:12]
  • Ken French on how momentum relates to market efficiency in Episode 100. [1:03:40]
  • Anecdotal misconceptions involving Warren Buffet and Renaissance Technologies. [1:08:54]
  • Whether or not people with specialized knowledge earn excess returns. [1:13:13]
  • Overconfidence as per Ben-David, Graham, Harvey, Scheinkman, and Xiong. [1:17:18]
  • Talking Cents: we share our comfortable and uncomfortable responsibilities. [1:23:53]