Who Causes Stock Market Anomalies? (w/ Victor Haghani) | #429

In this episode, we're joined by Victor Haghani, founder of Elm Wealth and co-author of The Missing Billionaires, for a wide-ranging conversation about how different types of investors shape financial markets. Victor explains the framework behind his forthcoming paper, Who Killed the Random Walk?, and how fundamental investors, static investors, and extrapolators interact to produce momentum, excess volatility, and other market anomalies.

We explore why return chasing is different from momentum investing, how investor flows and inelastic demand can move markets, and how the Merton share connects expected returns and risk to portfolio allocation. Victor also discusses long-short direct indexing and tax-loss harvesting, his experiment giving investors tomorrow's Wall Street Journal today, how AI performed in the same trading game, the role of leverage in financial markets, and when borrowing to invest might make sense. We finish with Victor's advice to his younger self: be intentional about financial planning, build financial literacy, and make a plan.

Key Points From This Episode:

(0:01:20) Lessons from The Missing Billionaires—practical insights on sizing and the Kelly criterion.

(0:03:13) Who Killed the Random Walk?—persistent puzzles in stock returns: excess volatility, momentum, fat tails, booms, and busts.

(0:05:06) Victor's three investor types: fundamental value investors, static investors, and extrapolators.

(0:07:54) How static investors amplify market movements through inelastic demand.

(0:11:11) How investor types interact to shape volatility, momentum, and equilibrium.

(0:14:02) Wealth flows between investor types and how they create instability in simulations.

(0:18:15) Distinguishing extrapolative return chasing from systematic momentum strategies.

(0:20:34) How extrapolators create price trends that momentum investors exploit.

(0:23:46) The Merton share—risk premiums, volatility, and risk aversion in determining equity exposure.