Weekend Reads: Efficient Markets, Enron, and Dilbert
Robert Shiller, Eugene Fama, and Lars Peter Hansen shared the Nobel Prize for economics this past week “for their empirical analysis of asset prices that greatly improved our understanding of how financial markets work, when they seem to work well and when they seem to work otherwise.” As Ron Rimkus, CFA, and others have already pointed out, there’s some irony in the fact that Fama, the father of the efficient market hypothesis, does not recognize the existence of financial bubbles, while Shiller, author of Irrational Exuberance, has gained considerable fame for sounding alarm bells for overvalued markets.
Shiller, of course, is also well-known for his use of the cyclically adjusted P/E as a measure of stock market value. Investors who are cautious on US equities today are quick to point to the CAPE, or Shiller P/E, as clear evidence of an overvalued stock market. Market bulls prefer to look forward and the promise of strong earnings, and they’ve been richly rewarded for their optimism over the past two years. This divergence of opinion is what makes a market truly efficient.
Here are some interesting reads you may have missed over the past few weeks.
- Jim Grant thinks America’s default on its debt is inevitable. (The Washington Post)
- David Rosenberg is reversing course on inflation and interest rates. (Wealth Track)
- An argument for “actively passive” investing. (Greycourt, PDF)
- Economic profit is the strategic yardstick you can’t afford to ignore. (McKinsey Quarterly)
- Robert Huebscher on the futility of the endowment model. (Advisor Perspectives, PDF)
- The world according to Jim Rogers. (Barron’s)
- George Soros on Angela Merkel’s pyrrhic victory. (Project Syndicate)
Asian Accounting under Scrutiny
- The science of forensic accounting in Asia. (Matthews Asia)
- Earnings management in India. (Securities and Exchange Board of India, PDF)
Twitter in Focus
- Nick Bilton writes of the savage dawn of Twitter. (The New York Times)
- Aswath Damodaran distinguishes between a good trade and a good investment. (Musings on Markets)
- #openingthekimono (The Economist)
Sotheby’s under Fire
- Activist Dan Loeb is targeting Sotheby’s. (Gallerist)
- Felix Salmon on Dan Loeb’s doomed Sotheby’s campaign. (Reuters)
Ethics and Governance Matters
- The Enron Code of Ethics handbook from July 2000 is a fascinating read. (Inside Investing)
- In “Open Season,” James Surowiecki takes on executive compensation and the “Lake Wobegon effect.” (The New Yorker)
- According to behavioral economics, women tend to make better investments than men. (The Washington Post)
- Can the ‘Yellen Effect’ attract young women to economics? (Bloomberg)
Relax and Recharge
- To remain industrious and generate its most innovative ideas, your brain needs more downtime. (Scientific American)
- “Zen and the Art of Management” (Financial Times)
For more on equity analysis: Aswath Damodaran will be one of the valuation experts speaking at the 2013 CFA Institute Equity Research and Valuation Conference in New York on 21–22 November. Delegates can hear from Damodaran and other speakers, including Wharton School Professor Jeremy J. Siegel and Morgan Stanley managing director Betsy Graseck, CFA.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: ©iStockphoto.com/JLGutierrez