How to Add 3 Nobel Prizes to your Portfolio

nerd money Dear Mr. Market:

What if you, the investor, had all the knowledge and findings that it took to win a Nobel Prize in Economics? Would you be a better investor? Believe it or not…with the amount of news disseminated in today’s hyper-information and “data dumping” world…you likely already have all it takes to be a more disciplined and well schooled investor.

This past Monday (10/14/2013) the winners of the prestigious Nobel Prize for Economics where announced.  All three winners were American, which marks a trend as at least one American has won the award since 1999.  The winners: Eugene Fama, Lars Peter Hansen and Robert Shiller were recognized for their outstanding research and work in the financial markets.  While their work does not perfectly align there are several similarities and the bottom line is that you can never trust Mr. Market!

 Summary Of The Winners:

  • Eugene Fama’s research has revealed the efficiency of financial markets. If you’re a financial advisor who makes a living pitching expensive mutual funds or annuity products at clients you won’t likely have a framed portrait of Dr. Fama in your plush office.  Fama basically states that the market absorbs information so quickly that investors simply can’t outperform it consistently.  He is credited for popularizing the use of index funds as an investment option.
  • Lars Peter Hansen works strictly with data (econometrics), creating statistical models in an effort to test competing theories.  His work has allowed researchers to focus on what truly drives the financial markets. Of the three winners Hansen is the least known and popular but he ironically helps connect the other two winners’ work into something investors need to be aware of; you simply need to derive conclusions from what you do AND do not know.
  • Robert Shiller is best known for creating the Case-Shiller Home Price Index Study and now perhaps for the fact that he is married to Janet Yellen, the next Federal Reserve Chairman.  We’re huge fans of behavioral finance so the next time you hear someone talk about a “bubble” you will know who originally broke ground on the concept. His research has shown that investors are irrational and that markets develop bubbles that will eventually burst (he predicted both the Tech and Real Estate Bubbles).

While the three winners have different areas of specialty there are definitely similarities that investors can use with their own portfolios.  Allen Sanderson with the University of Chicago perhaps summed it up best, “Collectively, Fama, Shiller and Hansen didn’t create a simple, unified theory of how financial markets work. Rather, they worked like “blind men feeling an elephant” — each finding a bit of the truth in a vast and complicated field.”

If these winners truly are the brightest minds in the world what can the average investor take from their years of work and utilize within their own portfolios?  Here are a few of the highlights:

  • Investors and professionals CANNOT outsmart the market.
  • The stock market is prone to irrational exuberance.
  • Stock prices cannot be used as an indicator of where the stock market will go in the future.
  • Investor emotions, biases and preferences can collectively influence the financial markets.

You’re smart enough to have read this article so far and if you can connect a few more dots a huge answer will be right in front of you. It’s not that you need more information or a Nobel Prize to invest wisely. What most people need is a way to cut through some of this and get to what matters. Do you remember listening to Alan Greenspan speak years ago before the “dot-com” bust? If you invested the two hours on any one of his presentations your vocabulary might improve but your brain would be complete hamburger meat. At the end of a rather infamous dry and complex speech he essentially said the stock market was overvalued. The term “irrational exuberance” was born. That’s it…”voila”… Two hours of high level Ivy League economics and labyrinthine nexus points and you get two words Joe and Jane should actually chew on.

There is no dispute that all three winners have made an impact in economic and financial sciences throughout their careers.  What investors need to realize is that nothing in the reports is new information.  The key facts have been known and proven for years. In our opinion that’s the problem (or challenge) with today’s finance world.

There is an immense amount of information out there. Half the battle with economic information or results from these studies is trying to filter out the noise and product pitches that often come with them. Once you or your financial professional is adept at doing this you’ll realize that investing is a much more simple science. We constantly write about these studies and topics and attempt to make them more understandable and actionable.

Here are some articles we have written that incorporate the results of Fama’s, Hansen’s and Shiller’s work:

We aren’t by any means attempting to put ourselves up on a pedestal – if you do an online search for any of these topics you will find countless articles and commentaries.  In closing what we are saying is that any investor should use these principles in managing their own portfolio or insist that their Financial Professional does!  If you would like to discuss in more detail we would encourage you to contact us at your convenience by either email at or by phone at 1-800–47-GUIDE (800-474-8433).

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