On Efficient Markets

So Mr. David Booth was on campus for a lunch with students on Tuesday. I'm all about free lunch but I also was curious to hear what he had to say. (And wishing DFA was open to retail investors.) When I acknowledge the fact that I've become incredibly skeptical of the value of active management, many seem to assume I've fallen under the lure of Chicago's efficient market gurus. Perhaps. But the salient question for me is not whether markets are perfectly efficient (it's hard for me to go that far) but whether the amount of money to be made from inefficiencies is worth the cost. And more importantly, if you are paying for someone else to exploit the inefficiencies, can they actually generate more value than they are worth? While in any given period, someone can be the "rare orangutan" (as Booth so lovingly put it), but can they be the rare orangutan consistently? Likely not. Likely you're paying for leverage and/or luck. And certainly, a certain level of active management is necessary to keep any market efficient - but that level seems far lower than what we have currently, even with the current contraction.

Though I've been skeptical and suspicious about the alpha bit my entire working career, it's striking/surprising to me how complete my skepticism has become. I am still active in the Investment Management and Buffett groups and mentoring first-year IM aspirants. It's a somewhat strange experience. Sort of like continuing to go to church for the company after "coming out" to yourself as an atheist - a reasonably pleasant but meaningless activity.

Not doing stock pitches or sitting in finance classes makes me incredibly happy. When I first heard John Harris advise us this fall at the IM conference to do what we were good at, not what we wanted to be good at, I couldn't decide whether that meant IM or no IM. Now I know it means no IM. I am no stock picker. Few are. I will never be one of the world's great investors (if there are any), at least because I just don't care enough to bother. A disorienting and freeing realization. Listening to Booth this Tuesday it was hard to imagine anyone didn't feel as I did. But there's a good sized flock of my classmates still pounding their heads against the active management door. Hey, good luck to ya!