I’ve posted Entry #154 to my Valuation-Informed Indexing column at the Value Walk site. It’s called Why Advances in Our Understanding of How Stock Investing Works Are Recognized Slowly.
Juicy Excerpt: One, 32 years is not really that long a time-period in the grand scheme of things. We are accustomed to experiencing rapid change in many fields of human endeavor. Try to sell a computer that was popular 32 years ago today and you will not get far. So in one sense 32 years really is a long time.
The difference is that the idea that the market is efficient (and that, thus, Buy-and-Hold strategies can work) is rooted in economic theories that go back a long, long way. The idea that the market is efficient is rooted in a belief in the Rational Man economic assumption. That one goes back to the days of Adam Smith!
The historical reality is that economists have been losing confidence in the Rational Man concept for a long time. Eugene Fama expanded use of the concept to the investing realm just about at the time when it was running out of intellectual steam in any event.
In days to come, the expansion of the concept to the investing realm will be seen as the last nail in its coffin. The Rational Man concept could do only so much harm for so long as it was merely an idea employed by economists. Now it is an idea that is causing massive destruction to millions of middle-class investment portfolios. It’s going to be hard for us to ignore the obvious and well-documented flaws in the idea once it brings on the Second Great Depression.
Still, when you consider that this idea has been influencing economic thought for several centuries, it does not seem so shocking that it has been possible for influential people to turn their eyes from the flaws in the investing strategies rooted in it for three decades now.