I’d rather be an investor in 2024 than in 1971. Back then, investment options were limited, opaque, and expensive. Portfolios were based on predictions and often highly concentrated.
Starting in the mid-1960s when computers became available, leading academics began developing and testing theories with stock market data. Within a short period of time, seminal research came out that paved the way for investing to shift from being a speculative sport to becoming a science. So, what did these academics uncover? For one, professional money managers performed no better than you’d expect by chance. After fees, they performed worse than chance and their results looked random. Gene Fama at the University of Chicago developed the efficient market hypothesis, which offered a sensible theory as to why. His main insight was that markets do a good job incorporating all available information and driving it into prices. That’s great news for investors because it means you can win without having to identify pricing “mistakes” or predict the future. In many ways, it heralded the democratization of investing. I was lucky to be at the University of Chicago as many of these new ideas were being developed. It’s hard to describe how exciting it was. Groundbreaking ideas led to –
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