Episode 66: Asset Allocation Funds, Private Equity IPOs, and The Efficient Market Hypothesis.

Welcome back to Rational Reminder Podcast! We kick off today’s episode with a discussion about the gap between investor performance and fund performance, the potential reasons why asset allocation funds produced a positive gap and the role that timing and volatility play in a negative behaviour gap. IPOs have been in the media a great deal lately – and not for particularly positive reasons and we tackle the topic with reference to specific companies. We also talk about Dimensional’s paper on the issues with IPOs since the early nineties and then we introduce you to The Fama Portfolio, a valuable resource that we will likely quote quite a bit from in the future! As we have mentioned before, the use of empirical findings is incredibly limited without a theoretical framework and we talk about why the conversation around the efficient market hypothesis needs to change and why general statements about markets are not to be paid too much attention to. We discuss the bad advice for the week and the importance of goal setting in retirement.

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Key Points From This Episode:

• The news item for the week: the gap between investor and fund performance. [0:01:33.0]
• Possible reasons why asset allocation funds produced a positive gap. [0:03:09.0]
• How timing and volatility play into the negative behaviour gap. [0:06:22.0]
• All the private equity venture capital IPOs that’s been covered in the media lately. [0:06:51.0]
• Companies who took large haircuts from their last private valuations before IPO. [0:08:05.0]
• How 1.3% of stocks delivered all the excess return between 1990 and 2018. [0:11:52.0]
• Dimensional’s findings regarding IPO issues in the States since 1992.  [0:13:01.0]
• The pyramid that should be used in making investment decisions. [0:16:06.0] 
• The complex yet high-value insight to be gained from The Fama Portfolio book. [0:18:05:0]
• Why it is vital for empirical findings to be back up by a theoretical framework. [0:20:32.0] 
• The paradox of the efficient market hypothesis and what markets are really like. [0:21:58.0]
• Goal setting in retirement, keeping focused and realizing that risk is always there. [0:25:51.0]
• Bad advice for the week about the deferred sales charge. [0:29:31.0]
• And much more!

Tweetables:

“People who are in more volatile stuff, especially if they’re not professional investors, and even if they are, might be more inclined to get in and out at the wrong times.” — @benjaminwfelix [0:06:30]

“The factors that we know that drive stock returns are also driving IPO returns.” — @benjaminwfelix [0:14:06]

“Empirical findings are interesting, but without a theoretical framework to look at the empirical findings and then retest the theory in the data, the original empirical results are not particularly useful.”  — @benjaminwfelix [0:20:32]

Links From Today’s Episode:

Rational Reminder Website — https://rationalreminder.ca/

Alpha Architect — https://alphaarchitect.com/ 

“Mind the Gap 2019” Article — https://www.morningstar.com/articles/942396/mind-the-gap-2019

The Fama Portfolio — https://www.amazon.com/Fama-Portfolio-Selected-Papers-Eugene/dp/022642684X

John Cochrane — https://faculty.chicagobooth.edu/john.cochrane/

Tobias Moskowitz — https://som.yale.edu/faculty/tobias-j-moskowitz

Download the transcript of this episode here: Rational Reminder Podcast – EP. 66 – Transcript