Top of the morning. Welcome to issue #4 of Signal.

This week we’re digging into one of the most famous (and controversial) ideas in investing. From behavioural quirks to Buffett’s decades of outperformance, we’ll look at where the theory holds up… and where it falls flat.

Let’s get into it →

Back in the 1960s, a young finance professor named Eugene Fama dropped an idea rewired business schools around the world. It was called the Efficient Market Hypothesis (EMH), and it basically declared: “Relax, kid. The market already knows everything.”

Here’s how it works: stock prices always reflect all currently available information. The second a rumour is whispered over a Wall Street martini lunch, the market instantly adjusts. Investors react, and the news gets baked into the price faster than you can say “buy low, sell high.”

If that’s true, then no one can consistently outsmart the market.

Fama’s market was an all-seeing, all-knowing machine. Which makes the smartest move, not fighting the market… but just owning all of it.

His idea led to the birth of index funds, and the quiet rise of passive investing as the default way to build wealth. It’s an elegant idea. Comforting, even. Just buy the entire market, sit back, and let compounding do the heavy lifting.

But here’s the thing: the real world has a nasty habit of punching elegant theories right in the face.

One of the oldest fairy tales in economics is that people are rational wealth-maximisers. The theory goes: humans are little calculators walking around, always making decisions that maximise their financial well-being.

If you’ve stepped out of your house at any point this week, then you would know this is far from the truth.

In the real world, people are messy. They’re swayed by emotions, fear, peer pressure, FOMO, and whatever headline they just scrolled past. The “rational actor” only exists in textbooks.

Take the lottery. From a purely logical standpoint, it’s a ridiculous purchase. The odds of winning are so small they may as well be zero. Statistically, you’re more likely to be struck by lightning twice than to hit the jackpot once.

And yet millions of people buy tickets every week. Why? Because hope is powerful. Because we’re storytellers, not spreadsheets. For a few bucks, you get to daydream about quitting your job, buying the mansion, driving the Ferrari. It makes no rational sense, but it makes perfect emotional sense.

In fact, there are several well-known anomalies that are hard to explain if prices always perfectly reflect all info. Here are three of the juiciest.

Since 1928, stock returns tend to be negative in September, while all the other months are neutral or positive. It makes zero sense under EMH: new information doesn’t arrive just because the calendar hits September. Yet historically, there’s a statistically significant pattern.

Why might this happen? Some have pointed to investors feeling tax pressures, end-of-summer slowdowns, or institutional portfolio rebalancing in autumn. But whatever the cause, the pattern implies markets are reacting to psychological, seasonal, or behavioural rhythms, none of which are rational updates.

According to the EMH, investors with access to all relevant information will come to the same conclusion about what an asset is worth. As rational creatures, they will bid in accordance to this agreed upon value.

But it turns out that in a bidding war, the winner usually overpays.

Why? Because the very act of “winning” often means you were the most aggressive bidder in the room. And the more bidders there are, the more aggressive you have to be to win. Which raises the odds that your final bid is above what the asset is actually worth.

Equity Premium Puzzle

One of the oldest rules in finance goes like this: the more risk you take, the more you should get paid. Higher risk means higher returns; not because markets are generous, but because the extra profits balance out the times you’ll get smoked.

In theory, stocks are riskier than government bonds, so stocks should pay you more. Bonds are safer, so lower returns make sense.

But here’s the thing: in reality, stocks have crushed bonds for over a century, beating them by an average of 6.4% per year. That’s not a “small bonus for extra risk.” That’s a canyon.

If markets were perfectly efficient, that kind of gap shouldn’t persist. The explanation? Human psychology. We’re hardwired to hate losing more than we like winning. That’s myopic loss aversion in action: investors can’t stomach the gut-wrenching swings of stocks, even if the long-term math says it’s worth it.

So they underprice stocks, overprice safety, and end up leaving a fat premium on the table for those willing to ride the rollercoaster.

Warren Buffett called BS on efficient markets.

In his famous essay The Superinvestors of Graham-and-Doddsville, he pointed to a very inconvenient sample: a small but consistent group of investors who studied under Ben Graham, applied value principles, and went on to trounce the market. Not once, not twice, but decade after decade.

Luck? When it’s dozens of investors, all with the same intellectual framework, all producing above-average results over long periods? That’s not luck. That’s a pattern.

Instead of treating stocks like lottery tickets or trading cards, these investors treated them like fractional ownership in real businesses. They looked for gaps between price (what the market says it’s worth today) and value (what the business is actually worth if you owned the whole thing).

Buffett skewered the EMH with a simple thought experiment: when real businesses change hands (say, a family selling their company to a buyer), does anyone obsess over whether the deal is inked on a Monday or a Friday, in January or in July? Of course not. They care about what the business is worth and what price they’re paying.

Yet EMH academics spent careers studying whether small slices of businesses (stocks) were mispriced depending on arbitrary factors like the day of the week in order to find an edge. From Buffett’s perspective, this was missing the forest for the trees.

Charlie Munger once summed it up perfectly: the EMH is “obviously roughly correct.” For the average investor, markets are mostly efficient. Most of the time, prices reflect the best available information, and most people, most of the time, will end up with average results.

And that’s not a bad thing. In fact, it’s liberating. Because if markets are mostly efficient, then index funds become one of the greatest inventions in investing history, since they let everyday investors piggyback on the collective work of the world’s smartest analysts and traders, without paying hefty fees.

But taken to the extreme, EMH is bonkers. Markets aren’t perfectly efficient because people aren’t perfectly rational. Stories, biases, and cycles still shape prices, creating the occasional cracks where disciplined investors can find opportunity.

The trades, the ratings, and the thinking, straight from the RatedA desk.

Markets change. Businesses change. Our ratings change with them. In the past two weeks, one company joined the RatedA database for the first time.

We track how our Quality Ratings perform over time to see if higher-rated companies actually deliver stronger returns. Each rating category’s results are measured over a year and compared to the MSCI World Index, then refreshed annually when we update ratings.

We put our own money where our ratings are. The RatedA portfolio is a focused collection of high-quality, cash-flowing companies picked using our own methodology.

Inside this week’s memo: from infrastructure to semiconductors and financial services, AI is still agitating markets. Also, we made some important changes (two sells and two buys!) to the portfolio to better position for future growth.

That’s where the free version ends. From here on, it’s members-only: portfolio moves and the full thinking behind every decision.