My 18-month-old son’s favorite song right now has a catchy chorus that goes, “Bubble, bubble, bubble… POP!” and as with any toddler favorite, we sing it constantly, so it’s always stuck in my head. Lately, every time I open my WSJ app and see the word “bubble” splashed across a headline, the soundtrack kicks in automatically.

In the song, the bubbles always pop. So, should we be preparing for a big pop in markets, as the headlines suggest? Part of taking the long view is refusing to react to headlines. Our philosophy centers on tuning out the noise and anchoring decisions in evidence. But with all the AI “bubble” chatter, it’s worth taking a moment to examine this idea from a research-backed point of view, one that might surprise you, but ultimately help you rise above the noise.

What If Bubbles Don’t Exist?

Eugene Fama, Nobel laureate and architect of the Efficient Market Hypothesis (and a major influence on Hill’s investment philosophy), has a view that stops people in their tracks: He doesn’t believe in bubbles.

Not because he thinks markets are perfect…they aren’t. And not because prices never fall…we know that they do. He challenges the idea of bubbles because, as he puts it, you can’t scientifically prove that a price was ‘wrong’ in the moment.

Here’s what this means:

1. We only call something a bubble in hindsight.

When prices rise sharply, no one knows if it’s irrational because future growth could justify it. We only label it a “bubble” after a drop, which means we’re using new information to judge old prices.

2. A crash isn’t evidence of a bubble.

A sharp decline doesn’t mean earlier prices were foolish. It may simply reflect changing expectations, new information, or shifting economic conditions.

3. If something looks obviously overpriced, markets should correct it.

Nobel Prize winner, University of Chicago Professor, and Dimensional Director Eugene Fama argues that calling something a bubble implies that most investors were collectively irrational, something he’s deeply skeptical of.

Whether or not you fully agree with him, his perspective matters because it reminds us of something essential: the story of markets is driven more by narrative and emotion than data.

How this Connects to Your Plan

At Hill, we don’t spend time predicting bubbles. We don’t try to guess where the top is. We don’t build your plan around today’s headlines. Instead, we build portfolios (and relationships) around a different set of ideas:

• Evidence beats emotion.
• Your financial life shouldn’t be swayed by headlines.
• And you don’t need to predict what comes next.

So, Are We in a Bubble? The honest, evidence-based, answer is that no one knows. And we don’t need to. The goal isn’t to call the top. It’s to stay invested, stay disciplined, and stay focused on your long-term vision, the one we’re building together.

If you’d like to talk more about this, call us or email at askanadvisor@hillinvestmentgroup.com to set up a time. 

Since 1928, value stocks have outperformed growth stocks by 3+% per year on average. Legendary investor Warren Buffett is maybe the best-known example of a dedicated value investor, who throughout his career has captured an impressive outperformance of his own – Berkshire Hathaway has outperformed the S&P 500 from 1965 – 2019 by 10.3% per year.

So what is value investing? It is the bargain-shopping of the investment world. Introduced in the 1920s by Benjamin Graham and David Dodd, it’s an investment strategy based on finding stocks that appear to be trading for less than what they are actually worth (through analysis of the company’s balance sheet). In the 1990s, Nobel Laureate Eugene Fama and Kenneth French added fuel to the value fire by arguing that the value premium – the positive return investors get from investing in cheap stocks – largely explained equity outperformance in both the US and International markets. 

Recently, value has not been having its day in the sun. Over the past 10 years, growth stocks have outperformed value by 3.3% per year*. So what happened to value premium? 

Cliff Asness and his colleagues at AQR recently wrote a white paper titled Is (Systematic) Value Investing Dead?  Their argument? Long-term value premiums are alive and well. 

Said differently, even a sound investment strategy with a high expected return, like value investing, can underperform, even for extended periods. After all, without this inherent risk, we wouldn’t expect to see a positive return in the first place. That’s not to say the recent underperformance can’t continue, but if you are looking for the best odds of success, it would be hard to ignore the evidence over the long-term.

Our take: value investing is not dead. Far from it. Instead, true value investors earn their return in periods like these…by sitting still. Warren Buffett is quoted as saying “The stock market is designed to transfer money from the impatient to the patient”. Well said.

*comparing the S&P 500 (with more growth-oriented stocks) with the Russell 1000 Value Index