Barron's Streetwise - Weird Ways to Predict Stock Returns

Episode Date: September 25, 2026

Award-winning economist Alex Edmans discusses his new book, The Madness of Markets. Plus, a global money manager explains where to find value. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Behind any crazy decision or nonsensical decision, there is a grain of sensibility behind it, which is why these decisions keep getting made and my smart people force them. And the grain of sensibility is the idea that, well, if you snooze, you lose. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Alex Edmonds. He's a professor of finance at London Business School, and he has a new book out on one of my favorite topics. people getting weird with money.

It describes a lot of the things I write about. I'm something of a financial weirdologist, and Alex's research is a great source if you're into that sort of thing. And also we're hearing this episode from Andrew Lapping. He's chief investment officer at Randmore Fund Management. Andrew will give us a temperature check on the stock market and AI mania, and I'll talk about some less-watch stocks around the world that he's been buying. Let's get into it.

Listening in is our audio producer, Emily Sommelin. Hi, Emily. Hi, Jack. Emily, I have no spiel. Usually I do a spiel here. I say a few things about a few things, but I don't have a monologue. I don't have a rigamarole. Before we get to Alex, let's get weird with you.

Tell me about something that you spent money on, that you regret, that you shouldn't have done something. What's the weirdest or worst thing you've ever spent money on? I'm going to say charcoal. toothpaste. It was all the rage. So I bought some putting black on your teeth and with the theory that they will be whiter. And all the only thing that happened is my my sink got black permanently. Yeah. It's so you see you think that's just crazy enough to work and it's just, it could also just be crazy. Yeah. Okay. I'm going to tell you about two things I spent. This is the same ending, the same moral to both of these. These are things that I spent money on that I shouldn't

have. One was, and I might have told the story already in this podcast. This was, this was, probably five or six years ago, there was a very high bulb that needed changing, and I don't do well with heights. And I bought a special ladder to change this bulb, and it's a kind where it's got a platform on the top, and it's got something around you that you can hold on to so you feel secure. And I got like two-thirds of the way up the thing in my knees started knocking together. So I had to have something come and change the bulb for me. I had a guy who couldn't care less about heights and would have been fine with any old ladder come and change the bulb using my nice new ladder. And that's the only time that ladder has ever been used.

That's number one. That's the second worst thing. And the worst thing was only a few weeks ago. I was in the Adirondacks here in New York State. There was something, it was one of these type of zip line deals where you're like, you're running around the ropes in the trees and there's an obstacle course way off the ground. And so I sent the kids out for that.

They like that sort of thing. And there was something there called low rider zipline crews. And the guy explained it's perfect for someone like me who doesn't like being up high. It's a very casual thing. And so I paid, you know, no insignificant amount of money. You had to get in harnesses and there was a class. And then we went on the practice course and that one was like, you know, you're only five feet off the ground. And they showed you had a hook in so that, you know, you're safe when you're up high.

And, you know, you got up there and I latched in and I looked out. And it was like, it was like 20 feet off the ground. There's no way. There's no way I was ever going to do that. It was not a close call. I took one look at it. I said, nope. I had to go unlatched. I had to move around, maneuver around my wife and get back off the thing. And then she said, well, if you're not doing it, I'm not doing it. And I said, if you're not going to do it, because I'm not doing it, I'll do it. And I latched back in. And then she was going first. And she walked up to the edge of the thing. And she looked out. And she said, nope. She said, I'm not doing that. And I said, I would pay that guy. three times this much to not have to do this. I'm not even upset about the money I've spent. And on the way out of the place, we both bought shirts bragging. Stolen valor.

Stolen valor. It's so much stolen valor. Bragging that we've been to this place. I should have had the print on the back, prep course only. Anyhow, is that the worst money I've ever spent? I'm not sure. our way we had fun about it and we've laughed a lot about it since then and the kids have laughed a lot at us okay that's enough about me and heights let's get back down to earth and hear from professor

Alex over at london business school so if you had to sum up your main area of focus over the years and how it's changed what gets your interest what do you like to focus on your research it's mispricings in the stock market and so this can be of two sorts so number one sometimes the market does not respond to information that it should. So employee satisfaction is clearly financially material because human capital is the most important asset in nearly every company. Yet there's a highly public list, the list of the 100 best companies to work for in America, which as you say, I found that over a 28 year period, this was systematically mispriced

by the market. You could buy companies on this list and they would outperform by 2.3 to 3.8% per year. that's 89 to 184% compounded. So that's an example of the market underreacting to something that it should incorporate. But on the flip side, there's other parts of my research suggesting that the market overreact to stuff that it should just ignore. So my first publication showed that when a country is knocked out of the World Cup, the market falls significantly the next day.

Why? Because of investor sentiment. So investors just become more depressed, less optimistic after a big sporting defeat, and why they're humans and all humans are affected by emotion. So just like if you've had an argument with your wife and then you have to review a colleague at work, maybe you're going to be more pessimistic than you might do otherwise. Your companies can still perform just fine. Even if you've lost, even if it's an important soccer tournament and your home team has lost, the companies of your nation can still go on to prosper and perform well for investors.

That's good news. So that's amazing to me to think about that invest. investors would do that without even thinking about it, trade shares lower based on an event like that, and that you can profit from it as someone who knows about that. So this book that you've written, the title of it is The Madness of Markets, Why Smart Investors Make Crazy Decisions and How to Exploit Them. That strikes me as a crazy one. What are some other examples of crazy decisions that investors make? Yeah, so let's stick with the theme of overreaching. So there's not only overreaction to soccer results, which should be irrelevant, but there's also overreaction to cosmetic name changes. So let's give a recent example. So Allbirds, the sneaker company, back in April, they rebranded themselves as New Bird AI. And Allbirds has nothing to do with AI. It's a sneaker company. There's no evidence that it has the expertise to pivot to AI. But the market took this at face value. Anything with an AI label was leading to.

to over exuberance, the stock price went up by 582% in a single day. And notice this is not a one-off. This may be a feature of the market, not a bug. Why? Because back in the tech bubble, when companies added dot com or dot net to their name, the stockfice went up by an average of 73%, even if there was no change in strategy, no sign or evidence that they would actually be able to pivot towards. the internet. And so this is something which is categorical thinking. We overreact to a category.

This is now an internet company. We don't ask ourselves, is this company actually going to put this strategy into practice? And so the simple strategy there might be to short these companies after they have overreacted to something which is no more than cosmetic. I bet you there's some people. I mean, I think some people are, I don't want to say dumb. Maybe some people are dumb enough to bid up a stock just because of a name change. Or maybe there's people who are saying, hey, I wonder if the next person's going to do it. And if the next person might do it, I should try to do it first. And I guess in the end, there's no difference if you bid the stock up on something like that, whether you're trying to outsmart the people sitting next to you or whether

you're just making a bad decision, you're doing something that is wholly disconnected from the fundamentals of the company. And it's an opportunity for other people to profit by betting in the opposite direction, would you say? Yeah. So behind any crazy decision, or nonsensical decision, there is a grain of sensibility behind it, which is why these decisions keep getting made and my smart people forth them. And the grain of sensibility is the idea that, well, if you snooze, you lose. If you don't just sit there, do something. And we think to be a great investor, we should be responding to information. If we notice a company has changed its strategy, let's get on this and let's invest in it. And even if the current company can't do

this, maybe they're going to appoint a new CEO, and if we are to move immediately, we're going to get on the front foot. But the fit side is if companies know that investors take things at face value, then there is an incentive to do something cosmetic. And we see this not only in the tech bubble or the AI bubble, but perhaps the bubble, which happened just before AI was sustainability. So if you'll just add ESG to your name or sustainability to your fund title, then you had loads of money coming in, even though some studies found that they were holding tobacco companies or defense or fossil fuels. Again, people overreact to the label. And there's sort of good heart and good intent behind this. Let's get on this new trend.

I like hearing about these. This is fun. And it's a great idea for a book. Can you tell me some more things that people do that just don't make sense and where there's an opportunity to profit on the other side? Yeah. So let's think about other examples. of underreaction. So I talked about underreaction to human capital, but what are the other really important signals that might go under the radar? So the CEO is the most important person in the company, and they're important for investors for two reasons. So number one is they may have more information about their company than anybody else. So what you'd like to know is, is the CEO truly confident about his or her firm, or are they actually worried because they're skeletal?

in the cupboard. And you can't just listen to their public statements because they're going to say something upbeat anyway. So what you want is the equivalent of a poker tell. So this was some subtle thing that they do to give away that they're nervous about the company. And so one subtle thing you can look at is where they hold their AGM. So every year, a company needs to have an annual general meeting. And at the end of the meeting, there's the wild card, which is the microphone. as in there's an open Q&A that Shelders can ask anything. And if you're a truly confident CEO, you don't mind this because even if the question is a negative one, you get to set the record straight. But if you're truly nervous, you don't want to answer questions.

And so there are companies which hold this meetings in really remote locations. So there's a car company in Detroit, Michigan, which holds this meeting in McAllen, Texas. I don't know whether they even heard of McAllen, Texas. You can't fly there. You have to fly to Houston and drive 300 miles to get to this meeting. So this is really painful for the CEO, but the only reason he'd be willing to do it is if he just wants to escape scrutiny. There was actually an American company which held their meeting in Lahore, Pakistan, during a time of terrorist threat. They were willing to fly around the world to avoid these meetings. And so this is a great sell signal. So a study found that if you

held a meeting in a remote location, the stock then underperforms by seven to 12 percentage points over the next half year. Not even the next year. Over the next half year, there was this massive underperformance. I was going to guess Antarctica, but that top Antarctica for a meeting, an area where there's a terrorist threat. Exactly. And if you wanted to get to Antarctica, nobody actually went there to my knowledge, but somewhere close is the Siberian wilderness. company, which was willing to put up with a lot of freezing cold, the frozen tundra, because they did not want to be scrutinized. And why I like this strategy, and I'm glad you're laughing, is it suggests that the key

to beating the market is not statistical pyrotechnics. It's not running loads of Monte Carlo simulations, but it's common sense, right? It makes common sense that the CEO knows more about their company, and it makes common sense that if the CEO is shift-y, then there might be. skeletons in the cupboard. And this meeting location is just a really good way of figuring out, well, who are the ones who are worried about scrutiny. They don't give you a field on a stock screener where it says, is this a CEO a good person or not? It's hard to figure that out in a quantitative way. So are there any clues out there that you can point us toward?

There are absolutely. And hopefully you'll find this just as entertaining. So one clue that you can look at is, does the CEO have a corporate jet? So you might think, well, a corporate jet is actually good for the company because it means that the CEO gets to a meeting as able to negotiate at full throttle or sometimes you use it to go to golf courses and there was the CEO of RJR Nabisco who took his dog on the corporate jet. Passenger named G. Shepard, the dog went to golf tournaments. And so one study found that companies that use corporate jets. I'm still laughing about G. Shepherd. Go ahead. When a company discloses personal usage of corporate jets,

the stock price falls by an average of $300 million over the next year. Another thing which might be even wackier is the size of a CEO's signature in the annual report. And you might think, well, this is crazy. How can that tell you anything? Isn't this just something that if the space happens to be large, then the CEO's signature size will be large? But no, this is something which is actually potentially correlated with narcissism. What people did is, well, they said, well, link this to actually corporate behaviour.

So narcissistic CEOs, as measured by the size of their signature, end up doing splashy takeovers and moonshot R&D and vanity projects. Yet they neglected regular maintenance capital expenditure and the basics of running the business. Yet, while the company didn't outperform, the one thing that did outperform was their pay. So they were able to negotiate huge pay rises for themselves. And other people have looked at other signs of narcissism such as the size of your photo in the annual report compared to the rest of the top management team

or whether in interviews you use I a lot rather than we and so again these are quite subtle signals that are actually much more informative than you might think a little bit like how the Duo Lingo CEO said that he will assess potential hires based on how they treat the cab driver here whether the CEO views themselves as large than life is bigger than the company is something which may well be a negative signal.

Is there published research on that subject, the size of the signature and the link between that and returns or performance? Yes, absolutely. So this is the name of the paper is narcissism is a bad sign. So there's a bit of a pun there in terms of the word sign. And all of these things that are based on published research in the top academic journals to make sure it's not just one anecdote, but it's something which is systematically there in the data. Thank you, Alex. Let's take a quick break here. We'll be back with some more weird things people are doing in finance.

Welcome back. We're talking with Alex Edmonds, finance professor at London Business School. Let's get back to that conversation now. So one of the most sobering findings of a lot of research is that individual investors actually perform really poorly when they trade. So why is this? When you're trading, you're trading against, professionals who do this every day.

You might think you have a unique insight. You might say, well, I'm a physician. I understand that this pharmaceuticals company makes beta blockers. And I know that they address hypertension, high blood pressure, and I think high blood pressure might be on the rise because of changes in lifestyle. So let me buy this beta blocker company. But that's only one small piece of the picture. Do I have any idea about the production costs of beta blockers,

or how much they will retail for, or how much the advertising expenditure will be or what the regulation will be in terms of restrictions on prescription drug pricing, I only see one piece of the overall puzzle, yet I think because I have a little bit of knowledge that I'm an expert, a little bit of knowledge can be a dangerous thing. And there are studies which find that people are always overconfident

about their ability. So if you ask the average person, are you above average in your driving? 90% will say yes, even though only 50% can be statistically. Virtually anything you ask about, are you above average in terms of your sense of humor or your ability to get along with others? Again, 90% of people will say yes. And so why does this matter? It means that we think we're trading based on some great insight, yet we don't realize that we are

actually below average, particularly compared to the professionals who trade the market every day. So, to find this, it's actually difficult to see whether individual investors lose money, because if you ask your friends, they will only tell you about their most successful traits. They will keep quiet about... It's amazing how that works, right? I mean, that's social media, too. Everyone's good-looking. Every vacation is wonderful.

Everything's a success on social media because they're not telling you the stuff that went wrong. And everybody makes money on crypto. You have never seen anybody ever to lose money on crypto. So there was an intrepid finance professor who managed to get us hold of 78,000. and brokerage accounts. So you can look at every single trade that these people put on and what he found was just systematically

these people lost money. And who lost money more than the others? It was men. So again, the psychological evidence that men suffer even more from overconfidence than women. And the worst offenders of all were single men. So without a spouse to moderate their trading

or the prospect of kids to stop them yoloing into cryptocurrency at 2am, they were engaging in a lot of speculative trades. So again, this suggests that over-concours overconfidence is something we should be aware of, we often think we have insight, but actually it may well have already been priced in. If you're wondering why we charge young boys more for their car insurance than young girls, that's the answer right there. As someone who was once a 17-year-old new driver, I can tell you, they should pay more. The overconfidence will get you, I guess.

Yes, and actually, if you wanted to be nefarious about it, if you were a brokerage company, you'd actually want to offer lower fees to young men because you know that they're going to be trading more and paying you more in terms of commissions and bid ask rents. So I wonder whether anyone's going to put that as a business model. Very good. Alex Edmonds, thank you so much for taking the time to speak with me. I love this stuff. So write more of it. And keep in touch. Thanks so much, Jack. It was great to chat to you. Thank you, Alex. I'd like to play a little bit of a recent conversation I had with Andrew Lapping. He's chief investment officer at Renmore Fund Management. I wouldn't describe this as a stock pick conversation, although Andrew talks about a couple of stocks that he likes. It's not really a strategy conversation, although that comes up too.

It's more just about the high degree of AI interest here in the U.S. and some other pockets of the investing world that folks might be overlooking. Let's hear part of that conversation now. So if I were to ask you to share with me some of the stocks you like now, Would they be stocks that would take us away from AI? Very much so. So, I mean, I'll go from the top down. So where are our biggest allocations?

And our biggest allocations on Asia. And in that, it's China, Hong Kong. And what are the kind of businesses we like in Hong Kong? These are Chinese businesses where usually the founder is still very much involved. Some guy started a business 30 years ago in his garage. He still earns half the shares. So that's true alignment with other shareholders. And you're getting an entrepreneur.

Pay big dividends because that's how the founders get the money out and very strong in their space and growing. And then people say, oh, well, everyone wants that. But it's going to cost you 25 times earnings. No. Luckily in China, people don't love stocks because the Chinese stock market, as I'm sure you know, has been incredibly poor for a long time. And these are companies which have strong balance sheets, net cash in the balance sheet. as a business, we like to own businesses that generate cash. And it's funny, if you buy a business

that generates cash, it's often a cash on the balance sheet. And it's, you know, a lot of these businesses are we so cash generative. We so cash generative. Well, why you've got debt to, you know, debt to EBITDA four times, then you're either not generating cash or you're potentially making lots of acquisitions, which is also dangerous. So that type of thing. Another sector that is very out of favor is certain consumer sectors, whether it be food retailers, which we find interesting, and then some branded consumer goods products, whether that be something like Pernar Ricard or Diageo or even Constellation brands. These are liquor companies selling beer, whiskey, etc. And as I'm sure you know, that market's been very weak of late. So people used to

love those businesses, but they're very strong growers, pay 25 times earnings for them. Now people not so keen, and you can buy them on seven, eight percent free capital yields, maybe not growing incredibly fast. But in this world where many companies are highly rated and are high earnings, we think they're pretty attractive. So does it matter to you where in the world do you go for the stocks you like? Do you try to create a balance of regions? or you just go where the best companies are?

We go where the value is. So we will own and we do Philippine banks, Indonesian banks. Why? Because we think there's huge growth potential in the Philippine banking sector, very underbanked. The currency, the Philippine pace has been weak and on very reasonable valuations. You're buying a company that does 12, 13, 14%, 40% ROEs for less than book value. So we'll go with the value. leads us. I mean, not blindly. We are very risk-aware. We're not going to go and stick

25% of our fund in the Philippines. No, we're not going to do that. So we do look where our risk exposures, but we will happily invest in the vast majority of countries. I have a feeling that many of the names in your portfolio are going to be new to me. I certainly know both the boo's names that you mentioned. But what else can you tell me about companies that I might not be familiar with. It might not be here in the U.S. might not be household names to people, but which they should definitely check out for their investing.

So other little things we own, we own a Chinese business called TravelSky, which is a monopoly producer of technology for all the Chinese airlines and the Chinese airports, again listed in Hong Kong. And the Hong Kong market is liquid, good disclosure, things like that, English financials, That is something that does put us off from time to time.

If we can't get English financials, even the good translation programs are not great at translating, better translation, something else we own, which is funny because I'm sure you'll be familiar with their brands, but you won't be familiar with who owns it. It's the company could hire a smart home. So hire is,

let's say, the biggest or second biggest producer of household appliances. So they own GE, the appliance brand in the States, They own the band Candy, Fisher and Payicle are some of the brands. So what they've done, which is quite smart, is they've got Chinese tick, R&D, but they've bought well-known brands in developed countries. So people think they're buying a brand that are known for 25 years, but behind that brand is a Chinese company.

This is the other side of that we had a company here for many years called General Electric that wasn't quite sure what business it wanted to be in, whether it wanted to make, you know, televisions or going to show business or, you know, do financing. It did many things. And then along came a fellow that broke it up into a lot of pieces. And this is, one of those sales that they made was of the appliance business, and this was the Chinese buyer for it. That's an attractive stock. They're making good money with those brands. They're making very good money. And they've got an air conditioning business that's growing incredibly well. So they're big in China.

They are premium brand in China under the higher brand. And they've got another brand in China. And then growing very rapidly in the rest of the world. And the nice thing about these businesses, they take a very long-term view. And I think it's an interesting contrast to contrast, let's say, higher with company like Whirlpool. Higher spends, I think it's 3 or 4% of their revenue on R&D. So very aggressive R&D pays a nice dividend if it doesn't buy back stock, net cash in the balance sheets. You have a company like Whirlpool, which it's an interesting case study, this problem of companies buying back stock to bankruptcy.

So, you know, looking at the short term too much, buying back stock, buying back stock, not investing in your business, and suddenly you get a very, very strong competitor and your revenue starts falling. So those are the kind of things we like. Businesses where the leadership take the long view, run a conservative business, and slowly take over the world. if that's probably a bit of a strong statement. This is an economy with tremendous state control more than we're used to here in the U.S. A place where the government can pick winners and losers. And I think to myself, well, are we getting the best merchandise, the companies that list shares and they're available over here to U.S. investors?

Are they, I worry about, does it represent true ownership of shares in the way that we're used to here? What do you think about my concerns? I think your concerns are totally valid. For sure, they're risks. They're different kind of risks. So the first risk is competition. China is an incredibly competitive place. So you think you own a business and suddenly they're 10 competitors eating your lunch.

The second risk, they're different types of Chinese structures. So most, if not all the technology businesses, what you own, whether you buy it as an ADR in America or in the Hong Kong exchange, it's something called a VIE. a variable interest entity, you're not actually buying the stock. You're buying an agreement for the beneficial interest to flow to you. Okay, so that is something you have to be cautious about. That being said, they've been around for 30 years and there haven't been any issues. A lot of the smaller, normal industrial Chinese businesses, when you buy the Hong Kong listed stock, you actually are buying the underlying equity just like you would if you're buying a normal American company.

on the corporate governance, is it fantastic? No. That being said, there are many places in the world where corporate governance is poor, and there are so interesting things to look at one of our concerns with US companies, and it's interesting to look from the different size of the pond is executive remoration, which has gone off the chart. So at least, and it's not just the US, whether it be Japanese, Chinese, many European management are paid far more reasonable sums of money.

which we like. So Chinese management seems to be paid for use more sums of money, but obviously their risks. So if China invaded Taiwan tomorrow, is the stock exchange can be closed in Hong Kong? Those are things you've got to think about. But then flipping the other side,

you've got to say, look at the United States. United States, I think, of the MSCI Award Index, can wreck me if I'm wrong, but it's about 70% of the World Index. Okay, but it's only 20, 25 of World GDP, So the average person who buys a World Index Fund is actually investing, let's say, 70% their money in American companies, which also have risks. And the nice thing about investing in whether, let me say I'm looking at Philippine banks, you know, how many people are pouring over, I don't know, Amazon and trying to find if it's cheap or expensive compared to how many investors are pouring over BDO Unibank.

the level of competition where we're looking is just far less. And we can take advantage of that. And we can take advantage of people becoming positive or negative. And we're not, I mean, our weighting to China is probably 16% of funds. We're not enormous. And you've got to think when the locals hate the stock market, that's when you should go looking. And we actually found lots of fantastic companies, which then did very nicely for us, and we subsequently exited.

But we like to look where other people are not looking and avoid where lots of people are looking and lots of capital is flowing. Why? Because the more capital that flows into a sector or business and market, usually subsequent returns are not great. You've given us a lot to think about. Andrew, I've enjoyed this. Thank you. Good. Jack.

Any time. Thanks for questions. They are great. Thank you, Andrew. And I also want to thank Alex. and thank all of you for listening. Circling back to financial weirdness, what is the weirdest financial decision you've ever made?

Care to confess? You can put it in the comments at Apple or Spotify or YouTube. Write us a review while you're there. If you have a question you'd like, played and answered on the podcast, send it in, it could be in a future episode. You just tape it on your phone, use the voice memo app.

Send it to jack. How, that's H-O-U-G-H at Barrens.com. You know, Emily, Alex earlier was talking about big, signatures and he's got me thinking and I don't want to make my vocal signature too big right at the end of this episode. I'm just going to just going to tone it down a little bit this time. I'm going to tell folks, you know, look, thanks for, appreciate you listening. We'll see you next week. All right? Come on back and we'll do it again on a week. Right. It'll be no big one. Okay.