Posts Tagged ‘efficient market hypothesis’

factor investing vs hedge funds

Sunday, July 22nd, 2018

In 1992 Eugene Fama and Kenneth French, two professors at the University of Chicago Booth School of Business, published a paper that showed how investors could beat the stock market

tips for personal investors

Monday, February 19th, 2018

It is best to ignore short-term fluctuations in financial markets. “Staggering amounts of time and intellectual energy,” writes Miles Johnson, Capital Markets Editor of the FT, “are expended by market watchers who treat the latest leg up or down in US Treasuries or stock markets as imbued with meaning, only to reverse their view the following week.”

Benjamin Graham (1894-1976), a British-born American economist and investor, would agree. A prudent investor should either buy-and-hold, when prices are steady, or purchase assets when the price is low, and sell when they are high. Most investors do the opposite. Graham’s seminal text on investing, The Intelligent Investor, was first published in 1949, and reprinted many times before and after his death. It is still relevant today, and continues to be ignored by most investors.

Ben Graham, the famed father of value investing, used the analogy of the market as a business partner so mentally unstable he would on some days offer to sell you his share for a rock bottom price, and on better days would ask for a stratospheric valuation. This character, Mr Graham noted, would be a fantastic person to do business with.

efficient financial markets?

Sunday, August 23rd, 2015

Economists cannot agree on whether asset markets are efficient or not. This has very important policy implications. Freelance writer Anna Louie Sussman interviews New York University economist Paul Romer for a WSJ blog.

Sussman: Are there any areas where research or refinements in methodology have brought us closer to understanding the economy?

Romer: There was an interesting [2013] Nobel prize in [economics], where they gave the prize to people who generally came to very different conclusions about how financial markets work. Gene Fama at University of Chicago got it for the efficient markets hypothesis. Robert Shiller from Yale got it for this view that these markets are not efficient and subject to too much noise. ….

It was striking because usually when you give a prize, it

Blinder on Minsky on the efficient market hypothesis

Friday, February 20th, 2015

[Hyman] Minsky, who died in 1996, may have had the highest ratio of importance to influence of any economist in the twentieth century. He argued for years that financial fragility and recurring cycles of boom and bust (rather than equilibrium) should be the central concepts in theorizing about financial markets and the macroeconomy. Instead of assuming that markets are efficient and expectations are rational, he wrote, economists should assume that markets regularly go to extremes and that people forget. When the profession was being swept by the efficient-market tide, this was deeply contrarian thinking, but I think he was basically correct.

The financial world envisioned by Minsky is different in every respect from the one posited by the efficient-market hypothesis. As long as the good times roll, people lose sight of the bitter lessons of the past, claiming that

passive investing and the paradox of efficient markets

Sunday, October 5th, 2014

This weekend brings yet another insightful column from Tim Harford, the “undercover economist”.

Why spend time carefully choosing assets to buy, or lavishly paying active fund managers to do the job for you, when … such returns look so similar to the trained eye that it is pointless to try to pick a winner. Another phrase to describe this idea is the

private investment: mind the fees

Saturday, May 10th, 2014

Sorry to harp on this, but I am concerned that so many of my friends and relatives throw away good money by paying large fees to investment managers. Sadly, high fees are also charged by UNFCU Advisors, even though the United Nations Federal Credit Union, like all credit unions, is owned by its members.

The Financial Times has published numerous columns on this subject, all with the same advice. Here is the latest.

If you

Norway’s oil fund

Monday, May 5th, 2014

Norges Bank Investment Management is transferring custodianship of its huge investment portfolio from JPMorgan to Citigroup. Norges Bank is the central bank of Norway. Its oil fund is the world’s largest sovereign wealth fund.

Norges Bank Investment Management … holds on average 1.3 per cent of every listed company globally.

In recent years, the fund has made a concerted push into emerging markets

what would Hayek say?

Monday, December 23rd, 2013

Austrian economist Friedrich Hayek (1899-1992) was famously a foe of central planning, and fan of free markets. Nonetheless, Tufts University economist Amar Bhid

Robert Shiller on Eugene Fama

Sunday, October 27th, 2013

Professor [Eugene] Fama is the father of the modern efficient-markets theory, which says financial prices efficiently incorporate all available information and are in that sense perfect. In contrast, I have argued that the theory makes little sense, except in fairly trivial ways. Of course, prices reflect available information. But they are far from perfect. Along with like-minded colleagues and former students, I emphasize the enormous role played in markets by human error, as documented in a now-established literature called behavioral finance. ….

Actually, I do not completely oppose the efficient-markets theory. I have been calling it a half-truth. If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on. I personally believe this, and in my own investing I have avoided trading too much, and have a high level of skepticism about investing tips.

But the theory is commonly thought, at least by enthusiasts, to imply much more. Notably, it has been argued that regular movements in the markets reflect a wisdom that transcends the best understanding of even the top professionals, and that it is hopeless for an ordinary mortal, even with a lifetime of work and preparation, to question pricing. Market prices are esteemed as if they were oracles.

This view grew to dominate much professional thinking in economics, and its implications are dangerous. …. In fact, markets are not perfect, and really need regulation, much more than Professor Fama

efficient markets hypothesis (EMH) and global recession

Thursday, October 24th, 2013

Many in our profession are upset that Chicago economist Eugene Fama won a third of this year’s Nobel Prize in economics. Here is one example.

Eugene Fama just received a Nobel Prize for his contributions to the theory of