Shiller Says `Easy to Beat the Market' Long Term Bloomberg

in the last hour cliff and I spoke to University of Chicago professor former professor of cliffs Eugene fama he won the Nobel Prize in Economics last year for his efficient market theory which basically holds that all information about a security is already priced in and it's all but impossible for an individual investor to beat the market but on the other side of the Ring Yale University professor Bob Shiller has a different theory for how markets work and he also won the Nobel last year professor Shiller thank you for being with us this morning cliff I'm gonna let you kick it off sure um first professor Shiller I hope that you like me were very long shrimp last month that's a joke sorry I mom no we don't long shrimp either I just told Stephanie we don't time the mark and that includes the shrimp market um you know myself and one of my partner's John Liu just wrote an article on what we call the split Nobel Prize between you and and professor fama and our view was it was a very good thing for one thing we think we come out somewhere in the middle of you guys and for another we think both you have advanced the literature and our knowledge so much we did talk to gene just now we talked about efficient markets why don't we start off with you giving me your version of the inefficient Markets case if you can sum it up why our markets not efficient well first of all I'm an admirer of gene fama and I think that his theory of efficient markets is a half-truth so he's half right it's the fundamental thing is it's not easy to make a lot of money trading it's a competitive game and there's a lot of smarter people than you out there as well that's where did you mean that personally on that or that's yeah it's including you so cliff again but that's just common sense you know people knew that long before fam'ly what family did is present some evidence that looked very favorable like these events studies that he did it looked amazing like markets are really perfect but I think they gave kind of an exaggerated sense of perfection of markets and when you really get down to the truth what's driving the whole stock market if Emma would say apparently that it must be news about important real things that really matter and I don't think so I think the stock market is the overall market is probably driven mostly by psychology it is um is there any possibility of a meeting in the middle at the long term where prices are eventually right I don't think that is the funny thing about we spent a lot of time talking Jean and I at the Nobel Week the funny thing is that more or less we don't disagree that much except for interpretations and he keeps coming back to this idea that markets are perfect but yeah and the I think as of being kind of a fundamentally oriented investor for the long term something like that is what we call value investing and that by the way is substantially what gene fama does or at least his the company he advises dimensional Fund Advisors so it's largely a difference of interpretation gene fama doesn't seem to think that we should all just be completely diversified so are you saying people can beat the market I just want to get an understanding of where you see the biggest challenge to this efficient market hypothesis well it's easy to beat the market historically for example one can just go into a value stock over the long haul value stocks have outperformed the market and there's a number of anomalies in the literature that it's it's not so hard to it's not going to make you suddenly rich but you'll beat the market in the long run I am I started this I don't know if Stephanie believed me when I said we were going to get two people somewhat known for disagreeing who just split the Nobel Prize who would end up advising us on how to invest in a fairly similar way and I think and you tell me if you disagree I'm probably going to say back to you you said staying relatively passive keeping costs low and then tilting towards some known what what the academics call anomalies in English stuff that beats the market value investing being the most premier one I would also mention momentum investing low risk investing from from Fisher black do you think that's a reasonable way to invest in would your portfolio end up looking pretty similar to gene follows yeah actually I recommended DFA some time ago as a possible investment now they might have kind of a high fee which concerns me but in terms of their general strategy well let me let me change my tack professor if a QR can beat their fee by one basis point I'm just joking about that um should individuals trade we're here about high frequency trading and whether markets are rigged against them should they be trading at all whoo I don't yeah I don't like this Reid story that Michael Lewis is telling it's that's being a little sensationalist I think that it's it might be a good thing yeah I think for people to trade occasionally you don't want to trade too often because you lose in transactions costs so occasional trading but you know I think in the United States isn't that a positive for hft when we talk about losing in transaction costs transaction costs are lower today than they have ever been right yeah so I wouldn't worry too much about millisecond trading and I think that from time to time one should trade ones portfolio at least to rebalance but more generally when the market is looking crazy I think we have to have people willing to get out of the market that's what makes markets efficient the irony is that Pharma's efficient markets hypothesis if it were accepted by everyone the markets couldn't be efficient anymore yeah because there wouldn't be anyone enforcing efficiency and that is partly what actually caused this financial crisis too many people wanted to be free riders on everyone else and they just assumed that the markets were right yeah let us into trouble yeah I actually alluded to it earlier and I'll try to be a bit of a peacemaker here on it I don't think you mentioned gene believes in perfect efficient markets sometimes he gets pigeon holed that way he told us in class this was in the 1980s on that markets or I think the quote was almost assuredly not perfectly efficient because of exactly what you're saying is information costs and and and reasons like that someone has to make them efficient it's Grossman and Stiglitz see this might not work for for the world but for me and Bob we can just say things like Grossman and Stiglitz an act like we really said yes or something I got it but I do think and I think you'd agree that that gene would think they're more efficient than than you do so there is I'm not pretending there's no document help me understand what would it what would the perfect ish portfolio consists of right if everyone has different theories but at the end the same takeaway Robert if you were to put together a portfolio what would be in it generally well you have to be remain fairly diversified that's it's a question of what what does it mean to be diversified and that can get technical and difficult but you also have to consider your own situation and this isn't done very often but if you are an executive at an automobile company you should be short not long the automobile stocks as a way of hedging yourself and these are just very few do that Stephanie's going to do an expose on you you know that right exactly but what good is it a good idea to be diversified if I think Cliff Asness is the smartest guy out there but I have no track record history for you in the credit markets do I want to see you diversified across asset classes well first let me make just a broad statement it is a good idea to be diversified um anything you're not doing yourself if you if you're running your own portfolio which I don't miss really recommend and you know you're very diversified you don't have to diversify from yourself but when it comes to trusting other people there's no one on earth I put all my money with in fact I spread it out over many people Bob's talking I think about things like owning the world index of equities world indexes of bonds then and Bob Bob I and Jean all seem to agree on the value effect so let's focus that's like all good negotiations you start out with what you all agree on we'd probably all start with a pretty diversified world portfolio of stocks and bonds and tilt still own a lot of different things not on one cheap stock tilt towards cheap stocks my portfolio I would do more than that that's my business or other things I believe in but my portfolio and I'm going to guess Bob's which would look something like that to begin with and Bob can winning a Nobel Prize even before that he's allowed to comment for himself Bob what do you think I guess my fear is style drift because when I think about just before the financial crisis when all these managers started getting to products that weren't their expertise and then the market turned for them they were frozen and couldn't get out so one might say just stick to your knitting don't diversify uh that's it that's another theory what to put all your eggs in one basket and watch that basket who said that Mark Twain I think you know the real big difference between me and Eugene fama are having spent a week with him is not any concrete difference about portfolio diversification it's what gene doesn't maybe he has but he doesn't refer to psychology he doesn't refer to sociology he doesn't think there are fads and fashions oh maybe he thinks there are fads and fashions but he doesn't bring it up it's not in his genetic profile to ever bring up something like that but when I look at markets in the real world I see fads and fashions and I feel skeptical about them especially if they're related to traditional measures of overpricing and I want to down wait those things in my portfolio that's just not in gene fama vocabulary it professor if I may I'll play the role of farming here not only was I a student we go to the same barber I'm so working with fads and fashions um no well in fact I am and my firm is somewhere in between I I think for instance cheap stocks being expensive stocks is a combination of being somewhat riskier and not perfectly rational markets which are fads and fashions if anything I wrote my dissertation for gene on the success of the price momentum strategy which he was very open-minded and kind about by the way good mentor um and it's very hard to justify that one that one's a tough one to justify maybe one day we will but to justify why winners keep winning in the short run over six to twelve months is a hard one for the efficient market guys but but playing gene he would say and I've heard him say things like this won't get the exact wording right the behavioral estar great at telling stories about behavior and he believes him he doesn't think humans and robots are perfect but they're not as good at saying how they get into prices when there is a Fed out there um and I would have to say my sense is they do get into prices particularly when extreme but we are still fairly imprecise and how we we in our knowledge of how that process works and I'm curious how you would respond yeah I mean I keep I teach efficient markets I by the way I'd like gene fama I think that it's he's a brilliant academic the you know but doesn't always say things exactly right and so I think there are a lot of what happens it's just my view of world history it's not just in finance it's in politics we have these crazy Wars from time to time what you go back and look at any one of them in history anything what were they thinking you can't even imagine it in future of times I think stock market movements are like that now they're still hard to forecast and that's because there's a lot of people trying to forecast the craziness that's part of the job of being an analyst and people are doing that job so the market has kind of discounted into it optimal expectations of future craziness but the craziness doesn't go away from that it still remains

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Length: 13min 2sec (782 seconds)

Published: Wed May 25 2016