20 October 2013

Betting For Or Against Nobel Prize Winners

Posted In: Drivers of Value, Philosophy

This past week we learned that Gene Fama, Lars Peter Hansen, and Bob Shiller received the 2013 Nobel Prizes in Economic Sciences. These are relatively new awards that were first awarded in 1969 in honor of the founder of the Nobel awards, Alfred Nobel.

Nobel Prizes (excluding the Peace Prize, which is given by a separate committee in Norway) are based on the discoveries and insights developed many years before the award. A relatively small number of the awards given for economics have had their focus on securities selection. There is no substantive record of whether they are useful in producing winning portfolio performance. A number of past winners became highly paid consultants to investment groups after the award. These have produced nice lunches and wonderful dinners, but little in the way of commercially exploitable performance.

What are the Implications Of These Three Awards?

Each recipient was trying to find a systematic way to invest profitably. They should have gone to the racetrack and listened to those in the Grandstand or, even better, in the higher priced Clubhouse. After each race, people talk about why their particular choices will win in the next race. If someone has a number of winners in succession — or at least a preponderance of winners — he or she is said to have a “system.” Having been exposed to these various systems, whether they have been mathematically based or dependent upon anecdotal information about the horse, its breeding, its trainer, its jockey, the jockey’s agent, the condition of the track, the colors of the horse, or what the jockey is wearing, I can attest to the fact that none of them work a majority of the time.

The key to making intelligent bets at the track and in the market is to be sensitive to changes from the past. Otherwise, one can be like some generals/admirals in the Pentagon, who fight the last war brilliantly; after the war, they determined what may have caused the victory or defeat.

Changing Conditions

One of the problems that arise when looking intensely at present conditions is that something that appears to portend broader changes may not be very important in the future, and other incidental observations could be the harbinger of bigger things to come. Two items caught my eye this weekend. I offer them up for my readers to consider or reject in terms of implications and importance.

The first item is that hedge funds reportedly have their biggest short position in gold since January. This may be a sideshow and only important to “gold bugs,” or it could be a clue of how some hedge funds are looking to play catch-up from being behind the larger market advances. Undoubtedly various markets will decline, perhaps meaningfully, at some point. The risk that all short sellers take is that, if the items that they are short move up dramatically, they may be forced to buy back the shorted securities at a rapidly advancing price. In other words, they could be caught in a short squeeze, particularly those who shorted gold. With announced trading volume quite light, a squeeze could be applied.

The second item is that yields on German bunds are closing in on the yields on US Treasury Bonds. For some time, global investors have felt more secure with the credit value of the German government paper than that of the US; as a result, bunds were more expensive and produced lower yields. The closing of the yield spread could indicate that global investors are less worried about the credit value of US government paper, which could be good for the US stock market from a foreigner’s point of view. At the same time, foreign currencies are appreciating against the dollar. Part of this may well be caused by an increase of US investments into Europe and possibly Japan.

Would you please let me know what you think?

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)

A. Michael Lipper, CFA

A. Michael Lipper, CFA, is president of Lipper Advisory Services, Inc., a firm providing money management services for wealthy families, retirement plans and charitable organizations. A former president of the New York Society of Security Analysts, he created the Lipper Growth Fund Index, the first of today’s global array of Lipper Indexes, averages and performance analyses for mutual funds. After selling his company to Reuters in 1998, Lipper has focused his energy on managing the investments of his clients and his family. His first book, Money Wise: How to Create, Grow and Preserve Your Wealth, was published by St. Martin's Press. Lipper’s unique perspectives on world markets and their implications have been posted weekly on his blog since August, 2008.