There certainly doesn’t seem to be any evidence of Grantham’s ability to exploit the supposed inefficiencies he is railing about. Thus, even if the market does exhibit inefficiencies, it seems Grantham and his investors would be better off investing as if there weren’t any.
Further evidence on the wisdom of this advice comes from the study “Behavioral Finance: Are the Disciples Profiting from the Doctrine?”Behavioral finance is the study of human behavior and how that behavior leads to investment errors, including the mispricing of assets.
The authors identified 16 self-proclaimed or media-identified behavioral mutual funds that practice some form of behavioral finance in their investment strategies. The study concluded that behavioral funds were really nothing more than value funds, and that after adjusting for risk, there were no “abnormal returns.”
Putting Your Money Where Your Mouth Is
I don’t think I could come up with a more appropriate conclusion than the following, which I took from an interview with one of the leading behavioral finance theorists, Professor Richard Thaler of the University of Chicago. “[Thaler] concedes that most of his retirement assets are held in index funds. And despite his research on market inefficiencies, he also concedes that: ‘It is not easy to beat the market, and most people don’t.’”
Larry Swedroe is the director of Research for the BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.