Eugene Fama, Nobel Laureate

Gene Fama won the Nobel Prize in Economics. This is important?

Fama is one of my heroes. He has been associated with the idea of efficient markets for years, but his true accomplishment is even more significant. The Efficient Market Hypothesis posits that markets discount information, and that the more public the information, the more completely it is reflected in stock prices.

As an undergraduate around 1950 Fama worked for a stock forecasting service and found that predicting prices was really hard. He hit on the EMH, and the rest is history. Or maybe not. He also found that there are systematic effects on stock prices from firm size and from firm valuation—small firms become big firms, and cheap companies mean-revert to fair value. He quantified these factors and published his work, setting off a race among researchers to find other predictors of excess returns in equities. It’s not often you get to contradict your own seminal research, and still keep your day job!

It’s hard to overstate Fama’s importance: he—along with several others—created the intellectual underpinnings of two major portions of the finance industry. Index funds rely on the long-term market efficiency, and hedge funds rely on systemic anomalies that can arise and persist, often for years. The fact that both industries are thriving speaks to the enduring value of Fama’s insight.

And it’s always amusing when critics of efficient markets recommend investing in low-cost index funds.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-10-15T10:48:18+00:00 October 15th, 2013|Global Market Update|0 Comments

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