In the early 16th century, the world of astronomy was on the verge of dramatic change. The Ptolemaic theory of a geocentric world was in constant need of repair. The path of the Sun, moon, and stars through the sky behaved as predicted, but those seven closer stars (we now know them as planets) did not (think of them as the anomalies of their day). As telescopes grew more powerful and the paths of the planets were measured with greater precision, Ptolemains responded by adding ever more epicycles in order to produce acceptable predictions. When Copernicus introduced his heliocentric theory in 1543, it was the beginning of the end for the geocentric theory and its many epicycle patches.

In today’s world of investing, the accepted theory is that markets are informationally efficient and as a result managers are unable to add value. The earliest version of this theory was that a manager could not beat the stock market as a whole. But when evidence began showing up that those who bought small stocks with low PE’s consistently beat the market, the new Ptolemains began adding their version of epicycles. Now a manager had to not only beat the market, but beat a subset of the market defined by the anomaly. When more anomalies were uncovered, more subsets were created. As does Loeper, many of the new Ptolemains have taken this to the extreme, adding dozens of US equity manager subsets (Loeper has 31!). The epicycles

Display article as PDF for printing.

Would you like to send this article to a friend?