How To Invest Like a Nobel Prize Winner

Today the winners for the Nobel Prize in economics were announced. This year’s prize goes to 3 American economists Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen. Their research has immediate implications for individual investors like us.



“There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.”


In the short term, asset prices are unpredictable and follow no direct correlation to fundamental data. Dr. Fama referred to this as a “random walk”.  This means no matter what you think you know, betting on short term swings in the market is betting on nothing but chance. This is why I have frequently referred to short term trading of your retirement savings as gambling. Buying quality assets for long term price appreciation is the key for investors looking for long term capital appreciation. The quality of an asset can be found by looking through a company’s financial statements, or it may just mean finding a passively managed, diversified mutual fund or ETF with a low expense ratio.



From Bloomberg:


“Fama’s research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day’s or a week’s time,” said Peter Englund, professor in banking at the Stockholm School of Economics and secretary of the committee that awards the Nobel Prize in Economic Sciences. “That shows that there is no point for the common person to get involved in share analysis. It’s much better to invest in a broadly composed portfolio of shares.”


This is why we focus on low cost, passively managed ETFs and Mutual Funds in our “Fund Spotlight Series”. For the great majority of investors, most of your asset allocation in stocks should consist of broadly diversified index funds. This isn’t just because it’s the easiest or cheapest way to invest (Though those are good reasons as well), it is because over the long term that will generate the highest returns for most investors.



“He (Schiller) concluded that rational models of the stock market, in which stock prices reflect rational expectations of future payouts, are in error. This clever combination of logic, statistics, and data implies that stock markets, are, instead, prone to irrational exuberance.”


Intelligent investors can capitalize on the short term irrationality of the majority of investors on Wall Street, and be in position to benefit greatly when things turn. Recently it was reported that Warren Buffett has made over $10 Billion from his investments he made during the depths of the 2008/2009 recession. When irrational investors fled, rational investors like Buffett swooped in and profited handsomely.


You can find decades of data from Schiller’s work on his website here, which I have used for numerous articles here on Begin To Invest:


Schiller also has a couple of books out, for those interested in looking into his work more:

Irrational Exuberance

Irrational Exuberance covers asset bubbles of the past and characteristics of each boom and bust. The second edition adds in his view of the housing market in 2005, which he credits himself as being one of the first to predict the housing market drop and subsequent stock market decline of 2008 and 2009.

Used copies of Irrational Exuberance are about $5 on Amazon right now, and certainly worth it for new investors worried about getting caught up in the next financial bubble.


His most recent book Finance and the Good Society (New in Paperback) on the state of today’s financial industry and its importance to today’s society. Its on my reading list, but haven’t checked it out yet.



In Conclusion


How do you invest? If you still think day trading or ‘swing trading’ your retirement account is your best bet, you better get researching, because there are already a few Nobel Prizes that say otherwise. Intelligent investing means keeping costs low, diversifying and letting compounding interest work for you.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *