StockTake: Eyebrows raised at Nobel economics call
Economist, author and Yale University professor Robert Shiller
Eugene Fama’s academic career is built on the efficient market hypothesis (EMH), dismissed by Robert Shiller as “one of the most remarkable errors in the history of economic thought”.
Little wonder eyebrows were raised when both were last week awarded the Nobel memorial prize in economics for their analysis of asset prices. Few dispute Shiller’s credentials, given his timely warnings on the dotcom and housing bubbles. Not so Fama. His belief that markets get prices right, that rationality rather than animal spirits guide investor actions, has been widely derided.
That doesn’t mean Fama, a formidable researcher, didn’t deserve his prize, or that EMH is worthless. Few investors ever beat the market and Fama’s findings helped grow the low-cost index investing industry. Investors who familiarise themselves with EMH would likely save time and money.
Still, EMH has also done much damage, and Fama has, at times, been absurdly rigid. In a 2010 interview, he dismissed talk of housing and credit bubbles, saying: “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”
The housing crash was not predictable, and most bubbles were “20-20 hindsight”; financial markets “were a casualty of the recession, not a cause of it”.
Ivory tower stuff. Shiller’s outlook makes more sense: “When I look around, I see a lot of foolishness, and I can’t believe it’s not important economically.”
A mixed week for UK fund legends
The UK fund industry was shaken last week by news that Neil Woodford is to leave Invesco after a 25-year run. Woodford, who will set up his own fund next year, manages £33 billion, and is often termed Britain’s answer to Warren Buffett. A long-term value investor who avoided the dotcom and banking crashes, his high-income fund turned £1,000 into £23,000 over the years, compared to an estimated £10,000 for the overall market.
Impressive? Undoubtedly, although compound interest flatters the figures. Multiplying your returns 23-fold over 25 years works out at 13.36 percent annually, compared to 9.65 per cent for a ten-fold return.
That’s great, but not in the league of Buffett, whose annualised 21.5 per cent returns are double the S&P 500’s. Eugene Fama and Co might ask if Woodford can keep outperforming, or if he was lucky to make a few big macro calls that worked out. Another UK fund legend, Anthony Bolton, took a battering after coming out of retirement in 2010 to manage funds in China. Rather than buying into his new fund at any cost, a strong case can be made for investors to replicate Woodford’s portfolio through low-cost ETFs focused on UK value stocks. (Tobacco and pharmaceuticals feature heavily in his portfolio).