We are an independent,
advisor that provides
With nearly $500 million in assets under management, our charitable foundations, trusts and endowments look to us to apply well-developed financial principles to real world portfolios.
- Irrational Exuberance, Efficient Markets and the Nobel PrizeView more
If the stock market could be predicted investing is trivial – buy what goes up; sell what goes down! Managing money then becomes the quest for the right expert. Since there is not much evidence of success, I wonder if the search is a “fool’s errand.” Recent winners of the Nobel Prize in Economics ought to be helpful – let’s look:
First, we have Gene Fama, godfather of the efficient market hypothesis, who would tell us that where markets go from here is random and no one knows. Save the money. On the other hand, we have Robert Shiller who says that market participants can do crazy things, which leads to “bubbles” that subsequently burst. Predicting “bubbles” can have a large payoff. (The third recipient – Lars Peter Hansen – was noted for his work on developing statistical models of financial and economic market behavior and admits he hasn’t much to say about these things.) What we have are two Nobel Prize winners who are willing to tell us what to do, but have contrasting views. We still need to know where we can go for Truth.
Truth is that market prices go up and down – sometimes by a lot! These Nobel Prize winners are recognized for their work to explain observed patterns of returns, not for predicting the future. It is up to us to translate what they are telling us into action.
Here’s how I do it: The Fama view is the default position; it is not necessary to agree that market participants are rational to accept the view that markets are reasonably good at determining value and it is awful hard to earn more than what is justified by the level of risk. While there can be periods of market “bubbles”, they are quite difficult to identify in advance. It is a costly “fool’s errand” to search for one to predict stock markets. Take the long view safe in the knowledge that markets will provide a return to capital and endure the ups and downs that not only will be a surprise, but are sure to come.
Next: Pay in the Financial Industry. Distribute anytime.
CONTACT RJR ASSOCIATES BY PHONE AT 315.476.8200 OR BY EMAIL.Send an Email