Weird Ways to Predict Stock Returns

The episode opens with host Jack Howe discussing personal financial mishaps, including failed attempts at extreme activities and a regretted charcoal toothpaste purchase. Professor Alex Edmonds from London Business School then explains his research on market mispricings, which fall into two categories: underreactions where markets ignore important information, and overreactions where investors overvalue irrelevant signals.

Edmonds presents several research-backed findings about investor irrationality. He notes that employee satisfaction metrics, publicly available through the best companies to work for lists, are systematically underpriced and can generate 2.3-3.8% annual outperformance. Conversely, markets overreact to cosmetic changes like name additions—companies adding ".com" or ".net" during the tech bubble saw average 73% stock price increases despite no strategic changes. Recently, Allbirds rebranding as "New Bird AI" saw a 582% single-day jump despite no AI business.

Edmonds highlights subtle CEO signals that predict negative returns. He discusses how CEOs hold annual meetings in remote locations (like Lahore during terrorist threats) to avoid shareholder scrutiny, with subsequent underperformance of 7-12 percentage points. Other narcissism indicators include large signature sizes and enlarged CEO photos in annual reports, which correlate with excessive spending on vanity projects and acquisitions while neglecting maintenance capital expenditure.

The conversation then shifts to Andrew Lapping's contrarian investing approach at Ranmore Fund Management. While U.S. investors concentrate on AI and mega-cap technology stocks, Lapping finds value in overlooked regions and sectors. His largest allocations are in Asia, particularly Hong Kong-listed Chinese companies with founder involvement, strong cash generation, and attractive dividend yields—trading at 7-8% free cash flow yields compared to valuations peers receive. He also favors neglected consumer sectors like brewers (Diageo, Pernod Ricard, Constellation Brands) and food retailers trading at historically low multiples.

Lapping provides specific investment examples including Travel Sky, a Chinese airline technology monopoly listed in Hong Kong, and Haier Smart Home, which owns Western appliance brands while leveraging Chinese R&D and manufacturing. He contrasts Haier's 3-4% R&D spending, dividends, and net cash position favorably with Whirlpool's stock buyback-focused destruction strategy. Lapping addresses geopolitical and structural risks in Chinese investments, including VIE (Variable Interest Entity) structures and government intervention, while noting that U.S. investors already have concentrated exposure (70% of global index funds) despite the U.S. representing only 20-25% of world GDP.