Investment advice from Nobel Prize winners

Date posted: November 19, 2013

Three U.S. economists recently won Nobel Prizes. Two of the three won for their contributions to investment analysis. N.C. State University economist Mike Walden explains the practical investment implications of these winners’ work.

“One of the winners, Eugene Fama, is the father of what we call efficient investment markets. And, simply, what that means translated is he argues there are no good buys in investing. He argues that the price of any investment in, say, the stock price when you’re looking to buy that stock, that price reflects already everything that is known about the investment, everything that is expected about the investment. So there’s really no way consistent way, he argues, for you to get down on the ground more and buy low and sell high. His implication, therefore, is not to stay away from the stock market but to buy a diversified set of stocks. And he also shies away from paying managers big bucks to find those big deals.

“Now the other Nobel Prize winner who won … for his contributions to investment analysis, Robert Shiller, disagrees a little bit with Fama. Schiller’s research has found that there are good deals. They may be short-lived, and they’re often the result of behavioral changes in investors. Investors get euphoric about a particular investment (and) bid that price up well above what the fundamentals would indicate. So Shiller argues you can find good deals. You can buy low (and) sell high for a short period of time.

“But even Shiller would agree, over the long period of time, you cannot consistently do that. So I think what both of these Nobel winners are saying, that is if you’re an average investor, if you don’t want to try to find those good deals in a short period of time, probably the best thing for you to do is to buy a diversified set of stocks, buy them (and) hold them over many decades.”

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