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Is Wall Street Happy With Economics Nobel Prize Winners?

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    October 16, 2013

    I have to wonder.

    Wall Street insists that markets cannot be timed, that the best strategy for retail investors is therefore to simply buy what Wall Street sells them, and hold through whatever comes along. And they prefer that you buy individual stocks and managed mutual funds because that’s where they make the most profit from commissions and fees, not from low-fee index funds.

    Unfortunately it’s all the media hears from Wall Street, and the media’s expertise is in interviewing Wall Street’s experts, and writing what is learned from them in interesting and compelling language. So the media inadvertently helps spread the ‘buy and hold’ myth, promotes stock-picking, and makes it all sound plausible.

    But what’s this? The winners of the Nobel Prize for Economics were announced this weekend, and they were Eugene Fama and Lars Peter Hansen, both of the University of Chicago, and Robert Shiller of Yale University.

    Here are excerpts from the press release from the Nobel Prize committee and its subsequent comments:

    “There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods. . . . . . . These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.”

    “Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock “prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.”

    “If prices are nearly impossible to predict over days or weeks, then shouldn’t they be even harder to predict over several years? The answer is no, as Robert Shiller discovered in the early 1980s. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.”

    “The work of the Laureates has affected not only academic research but also market practice. The fact that stock markets are very hard to predict in the short run, and that stock-picking is very difficult both in the short and long run, has led to close examination of the performance of[managed] mutual funds and the growth of index funds.”

    I can’t help but wonder how Wall Street will react. Or will they just ignore this additional proof that the market can indeed be timed, and that index funds are the best way to go in that regard, and hope it will go away without being noticed by most investors.

    The awards remind me of a quote of Robert Shiller’s in 2010 that I’ve repeated a few times since:

    “Can’t time the market? Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s, and the recent ‘lost decade’. Why didn’t more people do so? Doubtless they all had their reasons. But I wonder how many stayed fully invested because their brokers told them “You can’t time the market.”      Robert Shiller, 2010. 

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    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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