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Is The Stock Market ‘Overgrazed’?

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There’s an interesting new paper by Claude Erb, “Has the Stock Market Been Overgrazed?” He begins with noting that over time (since the 1920s), the beta, size and value premiums have all declined. He then asks: “What if too many investors are demanding too much from a possibly limited supply of opportunities?” Said another way, are the “trades” too crowded? If that’s the case, investors need to “find untrammeled parts of the investment ‘commons’ by developing new investment strategies seeking above average returns.” As Erb goes on to note: “A challenge arises though if these new strategies seeking above average returns end up recycling the underlying overgrazed building blocks of equity returns.”

Erb then presents the evidence showing how the size of the premiums have fallen over time, and are now at much lower levels than their historical averages. He also provides an explanation for the phenomenon: “Empirical research over the last fifty years has produced much awareness of past asset returns.” He added: “Empirical academic research breeds familiarity with previously successful investment opportunities” and “familiarity breeds investment.”

Read the rest of the article at Seeking Alpha.

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