23 Sep 2019
This is the second in a series of four of my investment letters dedicated to active management, focussing on some of the key figures involved in the study of market predictabilities. Having last month written about the “father of modern finance”, Eugene Fama, this month I take a look at Yale economist, Robert Shiller.
Shiller was co-winner of the 2013 Economics Nobel Prize alongside Eugene Fama. To many, it seemed a mistake - or at least a contradiction - that these two should share the prize. Fama is best known for the finding that markets were efficient or, rather, that they were efficient once trading costs were accounted for. Shiller on the other hand found the opposite, namely that there existed market mis-pricings that were big enough to profit from net of costs.
Although Fama is known for his early work which labelled him as a believer in efficient markets, his later research uncovered patterns and mis-pricings that he nowadays seeks to profit from through his work with Dimensional Advisors. These patterns, among others, related to the size and valuation of stocks (he found that small caps tend to outperform large caps and high book-to-price stocks outperform low book-to-price ones).
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