In 1906, a statistician by the name of Francis Galton visited a farmer’s fair in Plymouth, England. The fair was holding a contest where entrants could win a prize by submitting the most accurate guess for the weight of a butchered ox. Intrigued by the nature of the competition, Galton analyzed all of the contest submissions upon its conclusion. He observed that the average weight derived from the roughly 800 participant’s guesses was extremely close to the true weight of 1,198 pounds. In fact, the average guess was more accurate than the actual winner and the cattle experts that were at the fair. Galton published his findings and popularized the concept of the “wisdom of the crowds.” This idea suggests there are unique errors in the estimation process used by each individual contestant. A large portion of those errors may effectively cancel each other out when the individual estimates are averaged together.

While accurately estimating the weight of a butchered ox has little practical use for most investors, the wisdom of the crowds is a critical notion. The stock market is analogous to the fair’s contest, with a couple of important differences. Rather than a few hundred participants, the stock market probably has a few hundred million. Additionally, information related to each participant’s guess was not revealed until after the contest had ended. In contrast, every new and updated guess (transaction) in the stock market is updated and displayed in real-time. The stock market exhibits the wisdom of the crowds on steroids.

There was enough evidence that this phenomenon was occurring in the stock market that the Efficient Market Hypothesis (EMH) was proposed by the 1960s. The EMH states that market prices reflect all available information and expectations. This seemingly simple statement has generated decades of intense debate from both academics and practitioners alike. Among the most vocal opponents of the EMH are active stock pickers that believe they can beat the market by consistently identifying mispriced stocks. To do this, their estimate of value has to be better than the crowds. Every hedge fund, mutual fund, pension fund, endowment, and individual investor that buys or sells a given security imbues the price with the information that led to the transaction. For an active stock picker to outperform the market, their estimate must be more accurate than the collective wisdom of that entire crowd.

There is an old joke that finance nerds tell to poke fun at the EMH concept. It goes something like this:

“A finance professor (presumably a proponent of the EMH) and a student are walking across campus. The student points to the ground and says, ‘look, there’s a twenty-dollar bill!’ The professor scoffs and replied, ‘Impossible! If there were $20 on the ground, someone would have picked it up already!’ While the professor kept walking, the student picked up the money and used it to buy the first round of drinks at happy-hour that evening.”

In their book, The Incredible Shrinking Alpha, authors Larry Swedroe and Andrew Berkin modified this well-circulated joke into one of the best explanations of the EMH I have come across. After telling their version of the original joke, they write:

“This joke is told by those that believe the markets are inefficient and that investors can outperform it by exploiting mispricings. The market equivalent of finding that twenty-dollar bill is finding an undervalued security such as a stock or bond. However, the comparison to the EMH in this joke is actually misleading. The following version is a better one:

A financial economist and passionate defender of the EMH was walking down the street with a friend. The friend stops and says, ‘Look, there is a twenty-dollar bill on the ground!’ The economist turns and says, ‘Boy! This must be our lucky day. Better pick that up quickly, because the market is so efficient that it won’t be there for long. Finding a twenty-dollar bill lying around happens so infrequently that it would be foolish to spend our time searching for more of them…”

The EMH does not contend prices are always correct or that the crowd is always rational. The recent GameStop episode provides clear evidence that they are not. It also does not mean there are no avenues available to increase expected return beyond a pure passive strategy. Certain factors, including small company size, low price relative to fundamentals, and high profitability, have demonstrated the ability to deliver higher expected returns over time. Swedroe and Berkin conclude:

“Those that tell the first version of the story fail to understand that an efficient market does not mean there cannot be a twenty-dollar bill on the ground. It means that since you are so unlikely to find one, it does not pay to go looking for them.”

The EMH suggests the market’s price is typically the best estimate given all available information and expectations. Rather than searching for those twenty-dollar bills, investors are better served by ensuring proper diversification, managing costs/taxes, and tilting the portfolio to the factors that have been shown to improve expected returns.


  • Equity market volatility has picked up in recent days as long-term Treasury yields have been rising. The yield on the 10-Year Treasury bond has increased nearly 0.50% since the start of the year and is up 0.20% over the last week and a half alone. Coming into today, the S&P 500 has declined during five consecutive sessions, and the high-flying tech sector has been under increased pressure. This morning, Fed Chair Jerome Powell testified before Congress and affirmed the Fed intends to maintain its easy monetary policy, saying “the economy is a long way from our employment and inflation goals.” Stocks recovered some of the day’s earlier losses following his testimony. Long-term rates remain extremely low by historical standards and are likely moving higher as expectations for growth and inflation improve. This is generally considered to be a positive backdrop for the stock market (sans the richly priced growth stocks).
  • According to FactSet, 83% of companies in the S&P 500 have reported results for the 4th quarter. Of these companies, 79% have beat analyst’s estimates of earnings, while $77% have beat revenue estimates. The overall earnings growth rate for companies that have reported, blended with the estimates for companies that have not yet reported, is currently 3.2%. If Q4 ultimately ends up with a positive growth rate, it will be the first quarter of YoY growth since Q4 2019. This is a positive development for the stock market, as prices are clearly anticipating a sharp recovery.
  • Earlier this week, the Conference Board published their index of Leading Economic Indicators, which surprised to the upside. Today, data on the housing sector showed prices continue to trend higher, and consumer confidence improved more than expected. Tomorrow, look for the second half of Powell’s congressional testimony. We will get jobless claims, the 1st revision to Q4 GDP, and durable goods orders on Thursday. Closing out the week on Friday, look for an update on inflation.



  • Yellen Sounds Warning About ‘Extremely inefficient’ Bitcoin (CNBC)
  • Consumer Demand Snaps Back. Factories Can’t Keep Up (WSJ)
  • Short Sellers Help Stocks Find their True Values and Expose fraud, despite the hate they receive. (CNBC)


  • How Does the Stock Market Perform When Interest Rates Rise (Ben Carlson)
  • When Your Wild Trading Ideas Feel So Right (Jason Zweig)


  • Watch the First Ever Video of NASA Landing a Rover on Mars (CNBC)
  • The Padres Owe Fernando Tatis Jr. $340 Million. He Owes an Investment Fund Millions… (WSJ)
  • A Few Good Books (Morgan Housel)


Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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