Ten key points from Gene Fama’s latest interview
Gene Fama, the Chicago-based professor whose ground-breaking research on investing earned him the Nobel Prize, rarely gives an interview. When he does, it’s worth taking notice.
He has just given an hour-long interview to the Rational Reminder podcast and, once again, he doesn’t disappoint. (1)
To be honest, parts of the conversation are quite complex and require a degree of expertise in academic finance to understand.
But there’s plenty in it, too, for the general audience. Here are ten key points that Professor Fama makes that are likely to be of interest to investors and financial advisers.
His was the golden era of academic finance
My generation basically opened a field up and it was great to be involved, but we were kind of lucky. It was like fishing in a barrel: you just threw the line in and you always came up with a fish… (But factor research has virtually) stopped. People have stepped back and said, hey, is this really interesting or not? How are we going to shovel our way out if it isn’t?
Active fund returns are essentially random
If I look at actively managed portfolios, what I find basically is the distribution of returns is normally distributed around zero before fees and expenses. After fees and expenses, it’s a big negative-sum game. So the distribution of outcomes looks a lot like what you’d expect by chance if there were no ability to pick investments that have above-normal risk-adjusted returns.
Expected returns from private equity are hard to estimate
What is the expected return on private equity? The data won’t give you a good answer to that because it’s so self-selected. You only get to see the (funds) that survived pretty much. You don’t get to see how much money was put in that was totally lost.
He’s surprised that indexing isn’t bigger than it is
The evidence was there in the early ’60s that this was the way to go. And it took a long time before that had a big impact… Since the beginning of the research in the late ’50s, the world had gone from 0% passive to (nearer) 14%. To me, that seems slow.
Beware commentators warning of market bubbles
They’re seeing things that don’t exist. This is all just randomness. And that’s basically what I say about people who talk about bubbles. You’ve got to tell me how to predict the endings of these things, otherwise I don’t call them bubbles.
He won’t be buying Bitcoin
I’m not buying it. Its high price is very impressive. And the volatility is equally impressive. It goes up and down 30% in short periods of time… If it’s not being used as a medium of exchange, it should really have no value. And its volatility would kill it as a medium of exchange.
The Federal Reserve’s only option is to raise interest rates
They decided that the QE business was more important than controlling inflation because inflation was very low. But now they’re faced with (rising) inflation and their only tool is to raise the short-term interest rate… (Rates) can only go in one direction as far as I can see.
We can all manage four hours of deep thinking per day
I would say you have about four hours a day. I do my work in the morning and I do other people’s work in the afternoon, because in the afternoon I’m burnt out. It’s not important that you get (your thinking done) in the morning. You can go play golf in the morning, get the four hours in the afternoon, but then nobody else gets your time.
Two pieces of advice for young people
You’re going to spend at least a third of your life working. It’s important to find something that you really like to do. Otherwise those hours are going to be basically torture. The second part is to find something that not too many other people want to do so you can make pretty good money out of it.
The key to a happy and fulfilled life
I guess the primary thing is having a family that turns out to be something you’re really proud of. I’ve been really successful on that.
Professor Fama features in the 200th Rational Reminder podcast. (2) Congratulations are due to the two portfolio managers behind it — Benjamin Felix and Cameron Passmore from PWL Capital in Ottawa, Ontario. If you’re interested in sensible investing and financial decision-making, this is one of the best podcasts you’ll find.