The investors who generate big returns over five years, the guys they write books about, are supposed to keep winning, right? Well, they don't. Eugene Fama More Quotes by Eugene Fama More Quotes From Eugene Fama I’d compare stock pickers to astrologers but I don’t want to bad mouth astrologers. Eugene Fama bad-advice astrology investing Markets are efficient, but there are different dimensions of risk and those lead to different dimensions of expected returns. That's what people should be concerned with in their investment decisions and not with whether they can pick stocks, pick winners and losers among the various managers delivering basically the same product. Eugene Fama risk decision people I take the market-efficiency hypothesis to be the simple statement that security prices fully reflect all available information. Eugene Fama market-efficiency investing simple In an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value. Eugene Fama intrinsic-value efficient security I can't figure out why anyone invests in active management, so asking me about hedge funds is just an extreme version of the same question. Since I think everything is appropriately priced, my advice would be to avoid high fees. So you can forget about hedge funds. Eugene Fama would-be advice thinking Active management is a zero-sum game before cost, and the winners have to win at the expense of the losers. Eugene Fama zero games winning The efficient market theory is one of the better models in the sense that it can be taken as true for every purpose I can think of. For investment purposes, there are very few investors that shouldn't behave as if markets are totally efficient. Eugene Fama purpose taken thinking An investor doesn’t have a prayer of picking a manager that can deliver true alpha. Eugene Fama alphas managers prayer After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding 'no.' Eugene Fama persistence risk answers People would be a lot more skeptical if they understood that there is an incredible amount of chance in the results that you observe for active managers. So the distribution of outcomes is enormously wide - but that's exactly what you'd expect by chance with lots of active managers who hold imperfectly diversified portfolios. The really good portfolios contain a lot of really lucky picks, and the really bad portfolios contain a lot of really unlucky picks as well as some really bad ones. Eugene Fama lucky would-be people I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning. Eugene Fama mean people thinking I don't think the Federal Reserve has any role in how high rates are right now. I don't understand why everyone is paying attention to this tapering. The Fed is using one kind of bond to buy another kind of bond. What's the big deal, and why is anyone taking the Fed seriously? Eugene Fama investing attention thinking The distribution of the market is fat-tailed relative to the normal distribution... For passive investors, none of this matters, beyond being aware that outlier returns are more common than would be expected if return distributions were normal. Eugene Fama investing would-be matter With less regulation, I think you would see growth come back. Of course, there are situations where you need regulation. Antitrust regulation, for example, is a good idea because you want competition. But beyond that, it gets very difficult. Eugene Fama good you competition growth Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity. Eugene Fama day great good depression After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse. Eugene Fama skill good extraordinary past The problem that people don't understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they're not really active. They have to make bets. What that means is there's a huge dispersion of outcomes that are totally consistent with just chance. There's no skill involved it. It's just good luck or bad luck. Eugene Fama good chance luck people State constitutions typically provide that the state first has to service its debt, then make it pension payments, and then pay for services. What we don't know is whether that order will be enforced. And ultimately, the busted state is going to be looking to the federal government for a bailout. Think Greece, but on a much bigger scale. Eugene Fama looking think service government There's quite a bit of evidence that even professionals don't show any ability to pick stocks or to predict market rollbacks. Most of the people we identify as skilled based on returns have probably just been lucky. Eugene Fama predict ability lucky people Market timing doesn't work. If all the bubbles and all this mispricing really exist, how come so few people see it before it turns out that way? Eugene Fama see work people way
