Eugene Fama was not the first, but so far the most influential economic researcher to teach us that the market has a life of its own – and that we can trust in the forces of the market. In 1970, the then 31-year-old presented his „efficient-market hypothesis.“ Because Fama assumes that people on the financial stage act rationally, market activity is for him an expression of collective intelligence. The market is efficient because share prices and prices reflect all available information – even the information that only a few investors know about.
How does that work? As soon as investors have a piece of information, they can act on it. The price is too low? Buy! And the price promptly rises. Thanks to this mechanism, all available information is already contained in the prices. And no one can predict future prices. Because tomorrow's prices depend on information that no one knows today. That makes share prices unpredictable and market activity as a whole seemingly random.
So Fama argues that while we cannot predict in individual cases where a share price will move in the short term, in aggregate the information in market activity accumulates into rationally meaningful patterns that are capable of creating added value – that is, returns – over the long term.
A warning against false prophets
Now 77, he started out as a high-flyer in his academic field. His grandparents emigrated from Sicily to the USA. He was the first in his family able to go to university; he initially enrolled to study Romance languages, but by the age of 21 he was already fascinated by the stock markets. He switched to economics and, in 1964, earned his doctorate on the „behavior of stock prices.“ He spent the greater part of his career as a professor at the University of Chicago. His theory of an all-knowing market that the individual investor nonetheless cannot possibly see through shaped economics for decades. It was only fitting that Fama was awarded the Nobel Prize in 2013.
quirion has learned from Fama that „no one can beat the market over the long term, not even a bank. This has been studied many times over.“ Asked which stocks you should buy when no one knows which ones will do well, he says: „You buy them all.“ That's why we too prefer to invest in broadly diversified portfolios on the international market. This allows our wealth-management experts to keep rebalancing the fluctuation risks that arise.
Fama has always warned against the false prophets on the trading floor: „Many are dazzled by the stories about the few who do end up winning. They overlook the fact that, in most cases, it's simply luck.“ Instead, he recommends long-term investing: „Personally, I actually like to invest with risk. The thing is, over the long term you're better rewarded for taking on more risk. In the short term, it can go seriously wrong.“ We know this at quirion too, which is why we recommend investing for the long term. That way you can get through times of uncertainty in the global economy and secure yourself a market return over the long run.
Incidentally, Eugene Fama did not invest his Nobel Prize money in an investment portfolio: „I donated it to the University of Chicago, to which I owe everything.“
