October 18, 2013 • Scott McMurray
“Thirty years,” the Wall Street veteran told me when I was starting out as a reporter for The Wall Street Journal. “After 30 years, you’ve seen everything in this business.” So I guess that by his standards I qualify as all-seeing, if certainly not all-knowing.
With the epochal Wall Street rally that began in 1982 just getting up to steam, most investors, including your faithful correspondent, had Gene Fama and his theories about efficient markets (for which Fama shared this year’s Nobel Prize in Economics) in our rear-view mirrors. The chrome domes at the University of Chicago could theorize all they wanted about investors not being able to beat the market, the rest of us were riding stock pickers to the financial Promised Land. I’m looking at you, fellow former investors in Fidelity’s Magellan Fund.
Fortunately, David Booth and a group of like-minded Fama former students and acolytes not only drank the Fama Kool-Aid, they sweetened the pot. They started an investment firm in 1981 based on efficient market principles and brought Fama and several fellow academics on the Board. More than 30 years and $287 billion in assets under management later, Dimensional Fund Advisors [spoiler alert: DFA is a client] continues to use the work of Fama and others, notably his frequent collaborator Ken French, to refine their fund offerings. David Booth also donated $300 million of his own funds to the U of C business school that now bears his name.
A lot has been made of the fact that Robert Schiller was one of the two other Nobel recipients this year in economics. Schiller’s work focuses among other things on market inefficiencies, notably asset bubbles, and he was widely quoted in the context of the 2008 financial crisis. Didn’t this discount Fama’s influence? Seems like a red herring to me. Setting academic arguments aside, doesn’t the fact of asset bubbles make it even more imperative to follow Fama’s lead and invest in low-cost funds that track this or that sector of asset class A, B or C rather than betting on the next hot stock or stock picker?
The Nobel Prize awarded to Eugene Fama this month rightly acknowledges a giant in the field of finance for a life’s work of making us smarter investors. If only we would listen.
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