The stock market isn’t what it used to be, says veteran investor Cliff Asness, and it’s mainly the fault of social media.
Asness, a billionaire who earned his PhD under Nobel economist and efficient markets theorist Eugene Fama, says markets are less efficient than when he began investing three decades ago.
In a new 24-page paper, he discusses the prolonged underperformance of value stocks and cites data showing widening and longer price-value gaps. Why?
The rise of indexing and extremely low interest rates over the last decade may be factors, but Asness suggests technology, gamified trading and social media are the main culprits.
Efficient markets rely on the wisdom of crowds, but Asness asks: “Has there ever been a better vehicle for turning a wise, independent crowd into a co-ordinated, clueless, even dangerous mob than social media?”
Free, instantaneous, gamified trading, getting your “biases reinforced by exhortations on social media from randos and grifters”, filtered and delivered by algorithms which “push people to further and further extremes” – what, asks Asness, could possibly go wrong?
As you might guess, it’s not your typical academic paper. One footnote cites Dorothy Parker’s line, “What fresh hell is this?”
Rational investors will eventually get their rewards, contends Asness, but periods of underperformance will be “more severe and last longer”. Basically, “the more minnows doing crazy things, and the crazier they are”, the more likely that crazy prices stay crazy for longer.
