Who Causes Stock Market Anomalies? (w/ Victor Haghani)

Victor Haghani (0:00)

Understanding these extrapolators and how much they can affect behavior creates a lot more humility in terms of what the markets can and might do.

It's this more gradual thing. Momentum is a binary. With return chasing, it's this more gradual thing. I think as an investor, you just don't need to be following the news very much at all.

Benjamin Felix (0:23)

Welcome to episode 429 of The Rational Reminder Podcast. I'm Ben Felix, Chief Investment Officer at PWL Capital.

Cameron Passmore (0:31)

I'm Cameron Passmore, Chief Executive Officer of PWL Capital. Today, Ben, we're joined by Victor Haghani, who previously appeared in episode 270 Victor is a founder of Elm Wealth, which is a wealth advisory firm in the US.

He has over 40 years experience studying financial markets.

Benjamin Felix (0:50)

Studying and working in them, he's got real practical experience too. In the episode, we discuss how different types of investors impact the market, when leverage does or does not make sense, and what financial advice Victor would give his younger self.

Cameron Passmore (1:06)

Of course, we'll talk about our thoughts of the conversation at the end. But for now, let's get to the episode with Victor.

Benjamin Felix (1:16)

Victor Haghani, welcome back to The Rational Reminder Podcast.

Victor Haghani (1:19)

Thank you. Great to be here. For a second time, I'm honored.

Benjamin Felix (1:23)

We're excited to have you back and we have a lot to talk about. You've been busy writing about stuff since the last time.

Cameron Passmore (1:30)

Yes, just a little bit.

Benjamin Felix (1:32)

Victor, since the last time you were on, when we talked about your, at the time, new book, Missing Billionaires, what have you learned since then?

Victor Haghani (1:39)

In some ways, the thing that we learned is that there was a gap in the literature for this kind of book with this kind of treatment. Our publisher, God bless them, we're like, you guys have way too many equations in there. You're not going to sell any books. We're like, well, they're not hard equations. People will get them.

We've really been so pleasantly surprised by the fact that a lot of people have been interested in the book. When you write about something where people have a little bit of a blank area in their minds, talking about sizing and Kelly and the Merton share and all this, it's much easier to convince people because you're not changing anybody's mind. You're just sharing with them things that they might not have known. To be clear, we didn't come up with anything original in The Missing Billionaires. We were just channeling a lot of great research of other people.

It's been satisfying for us. Another thing that we learned is that a lot of people said to us, we love this kind of treatment and this kind of discussion at this level, and I wish that you would write something for my kids or for my nieces or nephews or my young friends or whatever that's shorter, that doesn't go into as much depth on sizing and is a more broader thing. So as we talked about before, we wrote a book over the summer that's coming out in early 2027 called Get Rich Once, and Other Financial Wisdom for Our Younger Selves. It's going to be available on Amazon for pre-order. So we could talk about that later, but just a quick plug there.

Benjamin Felix (3:08)

Yeah, I know that that's exciting. We will bring that back up later.

You mentioned you didn't come up with the ideas in the book, but it's pretty rare. I don't know if I can say that you're the first, but certainly one of the first to communicate those ideas, which can be pretty mathy and pretty technical in a way that's pretty practically accessible to a broad audience. That's what you guys really brought to the table with that book.

Victor Haghani (3:29)

Thank you. Yeah, that's really great to hear that.

Benjamin Felix (3:32)

I said you've been busy. You got a paper coming out shortly in the Journal of Investment Management, Who Killed the Random Walk. I want to ask a little bit about that. Can you talk about what some of the most persistent puzzles in stock returns are?

Victor Haghani (3:45)

Every class in asset pricing theory really starts off with all the things that asset pricing theory really has a tough time explaining. I think the biggest of all of the strange things about the stock market is this idea that there's excess volatility, that stocks bounce around by much more than fundamentals would seem to dictate. This goes back to Campbell and Schiller in the 80s, and is one of the big contributions of Schiller that probably led to his Nobel Prize is this idea that stocks are so much more volatile than changes in expected earnings. But there are all these other things too out there. There's persistent price level momentum in stocks. There's very stochastic volatility, but that it also persists. There's fat tails, there's booms and busts. All of these anomalies really, each one of them could kind of come up with some explanation, maybe a rational expectations type of explanation, or that there's some dark matter that's doing something. It's not that these haven't been explained, but we got attracted to trying to put together an explanation that would be comprehensive and touch on all of these.