Swedroe: Parrying An Attack On Fama

January 14, 2014

Third Avenue chairman’s attack on Eugene Fama arouses Larry Swedroe’s ire.

In Third Avenue Fund’s October 2013 annual report to shareholders, Chairman Marty Whitman severely criticized the research of recent Nobel Prize-winner Eugene Fama, calling it “utter nonsense, sloppy science, plain stupid, and unscholarly.” His letter included the following criticisms:

  • “I am disappointed that a Nobel Prize was awarded to Eugene Fama, who studies only markets and prices; and whom, I daresay, does not focus on Form 10-Ks or the footnotes to a corporation’s audited financial statements.”
  • “Modern Capital Theory (MCT) is of little or no help to those involved primarily with making investment decisions—value investors, control investors, most distress investors, credit analysts, and first and second stage venture capital investors.”
  • “For the value investor, the market is a place for a bail-out at high prices (versus cost), not a place where underlying values are determined.”
  • “The theory embodies the correct observation that almost no one outperforms relevant market indexes consistently. Consistently is a dirty word; it means all the time. In justifying and promoting Index Funds, MCT points to this failure of actively managed funds to outperform consistently. MCT acolytes, however, forget that many managed funds do tend to outperform relative benchmarks, over the long term, on average, and most of the time, notwithstanding their higher expense ratios.”
  • “MCT cannot possibly be helpful almost all the time to those focusing primarily on investment decisions.”

Whitman went on to list problems such as:

  • “An emphasis on short-termism. I think it is impossible to be market conscious about publicly-traded securities without emphasizing the immediate outlook at the expense of a longer-term view.”
  • “Overemphasis on top-down macro-factors such as forecasts for the economy, interest rates, the Dow Jones Industrial Average, with a consequent de-emphasis of bottom-up factors such as the financial strength of an enterprise, the relationship of a security’s price to readily ascertainable net asset value (“NAV”), or the covenants in loan agreements.”
  • “A belief in equilibrium pricing. An Outside Passive Minority Investors (OPMI) market price is believed to value correctly and OPMI market prices change as the market receives new information. Such a view, though widely held, is ludicrous. The fact that the common stocks of many well financed, growing, companies sell at 25 percent to 75 percent discounts from readily ascertainable NAV is mostly lost on finance academics who believe in efficient markets. They do not believe that such pricing can exist, though it does.”

 

 

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