The notion that financial markets know a lot has been around as long as financial markets themselves.   In 1889, stock market chronicler George Rutledge Gibson asserted that when “shares become publicly known in an open market, the value which they there acquire may be regarded as the judgment of the best intelligence concerning them.”  Hints of this same attitude could be found in the work of early economist such as Adam Smith—and even the religious thinkers of the Middle Ages.  While some medieval ecclesiastical scholars argued that lawgivers should set a “just price” for every good to guarantee that producers earned a living wage and consumers weren’t gouged, others, St. Thomas Aquinas among them, held that the just price was set by the market.

From the introduction to The Myth of the Rational Market

As I was thumbing though Justin Fox’s excellent new book this morning, The Myth of the Rational Market, it struck me that, when it comes to financial markets, there is really nothing new under the sun.  The debates being had today –capitalism vs. socialism, free markets and prices vs. “fair” markets and prices, etc. — are the same debate that our ancestors had when they crawled out of caves and began to barter animal skins with one another.  I suspect that 100 years from now, our descendants will be arguing these same points, just as passionately. Read the rest of this entry »

One benefit of living through a deep recession is that the hard times have a way of spurring innovation.  A rising tide lifts all boats, but the opposite can be said of a falling tide.   During recessions, inefficient businesses and business models either evolve or die.The few exceptions tend to be in “recession-proof” industries like higher education.  But, as we’ve discussed in prior posts, this recession has had a way of rattling industries that have never before been rattled.  

One of these is the sleepy market for college textbooks. Read the rest of this entry »

This post is a quick follow-up to our post earlier this week “When Genius Failed: Harvard Layoffs.”  Not all universities saw their endowments decimated in 2008.  Many, in fact, did quite well. Read the rest of this entry »

I hate criticising the CFA Institute because, as a charterholder, I end up inadvertently bashing myself. Still, the organization’s historical commitment to the Efficient Market theories has always been frustrating to me. The CFA Institute counts among its members some of the brightest minds in finance…yet much of its curriculum supports a theory that has been proven time and again in the real world to be patently false and unrealistic. Belief in the efficiency of markets given the series of meltdowns over the past decade is almost as crazy as continuing to believe in communism as an economic model given the failure of the Soviet Union. Read the rest of this entry »

Most money managers in the business today were taught in business school that the market is “efficient,” meaning that are meaningful information is already factored into the current stock price.  The implications are that the current price is the “correct” price, the market is never wrong, and there is no value to doing financial analysis or to buying anything other than a passive index fund.Of course, few of those managers actually believe in the efficient market hypothesis, or they would have found a different line of work. 

Warren Buffet had this to say about the notions that market are efficient: Read the rest of this entry »