I give up, and I’m back after only one day away from the internets.
Anyways, onto today’s topic. A couple of days ago, Eugene Fama’s Efficient Market Hypothesis came up somewhere in conversation. Fama thinks that value stocks performed better historically because it’s actually MORE risky, not less, which is the typically held belief of most market participants. I think, however, that most people are too simplistic in evaluating risk. When most people think about risk, they think downside risk only. However, many don’t consider that these boring value stocks typically lack growth opportunities, thus, there is additional risk in that these companies will not improve their topline numbers in the future.
This makes sense, as taking on additional risk requires additional risk premium in the form of better stock performance. So does this mean we should take as much risk as possible, hedged via diversification? Perhaps create a fund basket of the 100 most hated stocks in america, turned over once every year or two. If Fama is correct, this fund should beat the market over the long run.
