The Adaptive Markets Hypothesis: A Step In The Right Direction

As you read these Principles, I believe you will find merit in Dr. Lo’s adaptation.  I know I do, and I hope other academics will take up the cause and expand this research.  Principle 1A is one to take note of, as I believe it has particular merit today, although in opposite of what most of us would think.  We know that investors will act in concert irrationally during times of extreme financial threats; just think back to 2008 and early 2009.  Not only did individuals act irrationally, but a very large portion of institutions did the very same, joining the largest club of investors in the world, the Buy High Sell Low Club. 

Today I believe the next membership drive is about to start.  To be a member of this club you must begin with buying high.  Dr. Lo’s Principal 1A states investors will act irrationally due to financial threats, but the threat today is not a fear of losing money. In fact, it’s just the opposite; fear of not making any money when all your friends and peers are.  Wall Street affectionately calls this FOMO, or the “Fear of Missing Out.”

I have experienced this in previous bull markets.  We just hope this time it is not as disappointing as the last FOMO market in common stocks from 1998 to 2000.  The results were disappointing to those who jumped on the bandwagon late in the game. In the ten years beginning on January 1, 2000 and ending on December 31st 2010, the S&P 500’s annualized return, including the reinvestment of dividends, was just 0.36%.  We may have just seen the beginning of the next round of a FOMO market, or maybe it is just a false start. Time will tell.

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Disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and ...

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