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Schiller, Fama win the Nobel Prize
Old 10-14-2013, 06:44 AM   #1
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Schiller, Fama win the Nobel Prize

The Nobel economics committee has awarded the 2013 prize to Robert Schiller, Eugene Fama and Lars Peter Hansen.

Schiller and Fama's work is often cited here on ER.org, so we must be an insightful bunch. On the other hand, so far I've read three explanations of Hansen's work and I still don't have a clue about his methods.

The Nobel committee's fact sheet:
http://www.nobelprize.org/nobel_priz...iences2013.pdf

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

Fama, Hansen, and Shiller have developed new methods for studying asset prices and used them
in their investigations of detailed data on the prices of stocks, bonds and other assets. Their methods
have become standard tools in academic research, and their insights provide guidance for the
development of theory as well as for professional investment practice. Although we do not yet fully
understand how asset prices are determined, the research of the Laureates has revealed a number of
important regularities that are helping us to arrive at better explanations.
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Old 10-14-2013, 07:32 AM   #2
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Took a finance course from Gene Fama in B-school at UofC back in the day. Nice man, well deserved.
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Old 10-14-2013, 09:59 AM   #3
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Here is a recent interview. Schiller thinks that debt is not our major crisis, it is growing inequality.
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Old 10-14-2013, 10:51 AM   #4
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Originally Posted by LARS View Post
Took a finance course from Gene Fama in B-school at UofC back in the day. Nice man, well deserved.
Me too; I am now up to four laureates (Sigler, Becker, and Lucas in addition to Fama). I was hoping for Sam Peltzman to finally get the award; maybe next year.

Marc
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Old 10-14-2013, 12:04 PM   #5
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Quote:
There is no way to predict whether the price of stocks and bonds will go up or down over the next
few days or weeks. But it is quite possible to foresee the broad course of the prices of these assets
over longer time periods, such as, the next three to five years. These findings, which may seem both
surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars
Peter Hansen and Robert Shiller.
I would say that this bolded part is definitely not the consensus of thought leaders on this board. Unless I am unable to decipher some subtlety, the consensus here is that there is no way to make any stock predictions, for any time period. Also, the apparently most popular investment practices such as unvarying WRs reflect commitment to this belief.

Ha
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Old 10-14-2013, 12:57 PM   #6
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Originally Posted by haha View Post
I would say that this bolded part is definitely not the consensus of thought leaders on this board. Unless I am unable to decipher some subtlety, the consensus here is that there is no way to make any stock predictions, for any time period. Also, the apparently most popular investment practices such as unvarying WRs reflect commitment to this belief.

Ha
Well, I think there is some subtly there. I don't discount the idea of markets being at high or low valuations being likely to tell us something about where they are likely to go in the future.

What I do discount is my own ability to read those indicators accurately enough and understand how the rest of the market might react to them over time. The old saying 'the market can remain irrational longer than you can remain solvent' comes to mind.

I fear getting out, only to see the market rise, rise, and rise, and not being certain when/if I can jump back in. That's happened to me with some smaller trades, and it scares me to commit a sizable % of my assets to that approach. So for the 2008 major dip, we came out mostly OK with the recovery. I just don't know what would have happened if I tried to jump out and back in. Maybe I would have picked reasonable points, or maybe not?

So for me, B&H and a conservative relatively-constant WR (re-evaluated from time to time) isn't so much a commitment to any certain belief, it's just an uncertainty that the alternatives are better (for me). A wrong move with timing could be worse than no timing at all - that's a concern for me.

Can someone summarize their findings? I got through the first part, that seemed like the old concept of 'alpha' to me (high risk stocks provide higher returns overall). Not sure what they were saying after that.

-ERD50
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Old 10-14-2013, 01:42 PM   #7
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Originally Posted by ERD50 View Post
Well, I think there is some subtly there. I don't discount the idea of markets being at high or low valuations being likely to tell us something about where they are likely to go in the future.

What I do discount is my own ability to read those indicators accurately enough and understand how the rest of the market might react to them over time. The old saying 'the market can remain irrational longer than you can remain solvent' comes to mind.

I fear getting out, only to see the market rise, rise, and rise, and not being certain when/if I can jump back in. That's happened to me with some smaller trades, and it scares me to commit a sizable % of my assets to that approach. So for the 2008 major dip, we came out mostly OK with the recovery. I just don't know what would have happened if I tried to jump out and back in. Maybe I would have picked reasonable points, or maybe not?

So for me, B&H and a conservative relatively-constant WR (re-evaluated from time to time) isn't so much a commitment to any certain belief, it's just an uncertainty that the alternatives are better (for me). A wrong move with timing could be worse than no timing at all - that's a concern for me.

Can someone summarize their findings? I got through the first part, that seemed like the old concept of 'alpha' to me (high risk stocks provide higher returns overall). Not sure what they were saying after that.

-ERD50
Unless you act randomly, which I strongly doubt, your actions reflect a matrix of your beliefs relevant to the decision. Among your beliefs appear to be that there is difficulty in deciding when to disinvest and when to re-invest, and that this difficulty overcomes any positive value in being able to reasonably predict longer term market movement.

So your actions are completely in accord with your beliefs.

I understand all the concerns enumerated above; I just also believe that these concerns as they actually apply to US equity markets are dominated by the positive value of having a lower equity commitment when PE10 is high, and a higher equity commitment when PE 10 is low. You don't have to get it perfectly, or even nearly perfectly. This seems to be an idea that is foreign to many here. There must be some reason for this, but I have no idea what. Perhaps benchmarking?

When a person invests in individual securities he can use his estimate of individual values to temper this, but in my experience when averages go down, more or less everything else goes down too.

Ha
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Old 10-14-2013, 02:10 PM   #8
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Originally Posted by haha View Post
I just also believe that these concerns as they actually apply to US equity markets are dominated by the positive value of having a lower equity commitment when PE10 is high, and a higher equity commitment when PE 10 is low. You don't have to get it perfectly, or even nearly perfectly. This seems to be an idea that is foreign to many here.

Ha
I am one of the few that practice this logic in my own portfolio. lacking the credentials to defend myself, I prefer to stay silent.
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Old 10-14-2013, 02:18 PM   #9
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Quote:
Originally Posted by haha View Post
Unless you act randomly, which I strongly doubt, your actions reflect a matrix of your beliefs relevant to the decision. Among your beliefs appear to be that there is difficulty in deciding when to disinvest and when to re-invest, and that this difficulty overcomes any positive value in being able to reasonably predict longer term market movement.

So your actions are completely in accord with your beliefs.
That's fine, I would just word it a bit softer. Instead of 'this difficulty overcomes any positive value' I would just say the outcome is uncertain, so I hesitate to take action.

A parallel might be someone considering a ROTH conversion - maybe their situation is that they seem to be on the fence in judging if their future tax rate will be higher than their current tax rate. With this uncertainty, taking no action is an easier path than taking action.


Quote:
I understand all the concerns enumerated above; I just also believe that these concerns as they actually apply to US equity markets are dominated by the positive value of having a lower equity commitment when PE10 is high, and a higher equity commitment when PE 10 is low. You don't have to get it perfectly, or even nearly perfectly. This seems to be an idea that is foreign to many here. There must be some reason for this, but I have no idea what. Perhaps benchmarking?
I understand you don't have to get it even close to perfect to come out ahead. But a mistake can put you behind. That is what holds me back. Probably a form of loss aversion?

I do think PE10 is valuable, I'm just not sure how/when to act on it.

Maybe another parallel is the pro/con of re-balancing. While it seems to make good sense, some of my research shows that you are likely to be pulling money out during an extended bull, nullifying the benefits. So is action better, or just let it ride?

-ERD50
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Old 10-14-2013, 02:21 PM   #10
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Originally Posted by bjorn2bwild View Post
I am one of the few that practice this logic in my own portfolio. lacking the credentials to defend myself, I prefer to stay silent.
Just to clarify - I'm not attempting to defend myself. I'm just throwing my thoughts out there to get feedback, and to motivate me to question my own view. I'm willing to change, I just don't have enough conviction either way. Maybe something someone says will cause me to re-evaluate, maybe not.

I'm just interested in hearing other views, I'm not trying to change anyone else's mind on this.

-ERD50
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Old 10-14-2013, 02:51 PM   #11
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Originally Posted by ERD50 View Post
Just to clarify - I'm not attempting to defend myself. I'm just throwing my thoughts out there to get feedback, and to motivate me to question my own view. I'm willing to change, I just don't have enough conviction either way. Maybe something someone says will cause me to re-evaluate, maybe not.

I'm just interested in hearing other views, I'm not trying to change anyone else's mind on this.

-ERD50
Thanks.
I was not being critical. I am happy to read differing views including yours.
Math is exacting, investing is not.
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Old 10-14-2013, 03:22 PM   #12
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Thanks.
I was not being critical. I am happy to read differing views including yours.
Math is exacting, investing is not.
Oh, I didn't take it as critical at all - no problem. I just wanted to clarify my statement, as I've learned that things I say that seem so clear to me are read through a different lens. So I just thought my comment warranted clarification.

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Old 10-14-2013, 05:38 PM   #13
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Can someone summarize their findings?
I didn't take a look before posting this morning, but there is also a longer version of the committee's thoughts on the winners' accomplishments.
The Prize in Economic Sciences 2013 - Advanced Information

Skipping to page 45, there is readable summary of the practical benefits of their work. The summary of the summary is pasted below.

Quote:
...the research initiated by Fama, Shiller and Hansen has produced a body of robust empirical findings, which have important practical implications:

1. In the short term, predictability in stock returns is very limited, which is consistent with stock prices quickly reflecting new public information about future cash flows. To the extent that short-term return predictability can be found, it is too small to profit from because of transaction costs.

2. In the longer term, there is economically significant predictability in stock returns, indicative of variations in expected returns or discount rates. In particular, expected returns in “good” times (at the peak of the business cycle, when measures of relative valuation such as price/dividend ratios are high) are lower than expected returns in “bad” times.

3. In the cross-section of stocks, a number of factors such as book-to-market predict differences in expected returns. Stocks with a similar exposure to these factors co-move, implying that the higher returns come with higher risk.
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Old 10-14-2013, 06:19 PM   #14
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Originally Posted by haha View Post
I would say that this bolded part is definitely not the consensus of thought leaders on this board. Unless I am unable to decipher some subtlety, the consensus here is that there is no way to make any stock predictions, for any time period. Also, the apparently most popular investment practices such as unvarying WRs reflect commitment to this belief.

Ha
I started a thread last April citing an article which touted VLMAP is being an accurate predictor of where the stock market would be 4 years hence. (You might remember posting on the thread.)

VLMAP as a predictor of the market 4 years hence?

As luck would have it, about a month after I created the thread, VLMAP dropped to 40% which turned out to be a market high. More recently, VLMAP dropped even lower to 35% and is presently back at 40%.
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Old 10-14-2013, 07:53 PM   #15
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I started a thread last April citing an article which touted VLMAP is being an accurate predictor of where the stock market would be 4 years hence. (You might remember posting on the thread.)

VLMAP as a predictor of the market 4 years hence?

As luck would have it, about a month after I created the thread, VLMAP dropped to 40% which turned out to be a market high. More recently, VLMAP dropped even lower to 35% and is presently back at 40%.
Thanks for mentioning this thread again.

Off the top of my head, I think that 35-40% level is very close to earlier important longer term highs -which of course were eventually followed by impressive declines!

I have sold down to a tax threshold. I still hold one c-corp pipeline, 2 oil and Gas MLPs, one timber MLP, and one timber REIT. Plus one other CV-corp which is still short term. I also have two foreign equities almost 20 years in my portfolio . I will likely die with these.
I might consider selling some calls, or better yet buying some puts to push any possible gain over into 2014. I doubt I will ever have less than 50% equities; I am not there yet and not sure when I last was that low.


Ha
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Old 10-14-2013, 08:41 PM   #16
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....

Skipping to page 45, there is readable summary of the practical benefits of their work. The summary of the summary is pasted below.
Quote:
In particular, expected returns in “good” times (at the peak of the business cycle, when measures of relative valuation such as price/dividend ratios are high) are lower than expected returns in “bad” times.
Thanks for that link and quote. OK, this seems obvious, we have business cycles (but clearly, these are well respected brains and it's a lot more complicated than that!). But a period of 'lower returns' does not mean negative, so it still may not be good to get out?

I guess my problem is, I totally agree with the concept, I'm just not so sure I could effectively put it to work for me. There can be external things that upset expectations.


heh-heh, here's a recent quote from Rick Ferri over at BH, on a thread about PE10 -

Quote:
My recommendation is to be "cautiously optimistic."

If the market goes down, remember that I said to be "cautious," and if it goes up, remember I said I was "optimistic."

Rick Ferri



-ERD50
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