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Sunday, November 11, 2012

Recommended Reading For Harvard Undergrads

Greg Mankiw, Chairman of the Council of Economic Advisors under George W. Bush and author of  best-selling economics textbooks, recommended on his blog (number 1 rated economics blog) a recent interview of Eugene Fama - An Experienced View on Markets and Investing.  Mankiw recommended that the interview be required reading for undergrads studying financial markets.

As an aside, I would recommend Mankiw's blog and undergraduate text book (*buy used copy online - don't spend $235 new unless you're made of money) for anyone interested in economics or high school students aspiring to study economics. 

For those who might not know, Fama is generally referred to as the "father of modern finance."  His research forms the basis on which many portfolio theorists base their investment philosophies.

Interestingly, the bulk of the audience of Harvard undergrads for whom Mankiw recommends the interview will eventually end up in the higher end of the income spectrum.

Others who need to know this point of view are in high school playing the stock market game where they are trying to pick stocks that "beat the market."  They are playing games and hearing about investment approaches that enrich Wall Street.  They are indoctrinated into games that, at the end of their retirement years, will likely result in "nest eggs" significantly lower than they could otherwise have.  Most never hear about the evidence on building a portfolio using low-cost, well-diversified index funds.

Here are a couple of quotes from Fama in the interview:

After costs, only the top 3% of managers
produce a return that indicates they have sufficient
skill to just cover their costs, which means
that going forward, and despite extraordinary past
returns, even the top performers are expected to
be only about as good as a low-cost passive index
fund. The other 97% can be expected to do worse.

Asked what the conclusions are, he replies:

That an investor doesn’t have a prayer of
picking a manager that can deliver true alpha. Even
over a 20-year period, the past performance of an
actively managed fund has a ton of random noise
that makes it difficult, if not impossible, to distinguish
luck from skill.
Isn't it time that the low-cost, dividend approach to investing for retirement be explicitly incorporated into high school curriculums so that students understand an approach towards preparing for retirement?

*Even if you are made of money, buy the text used and send the difference to Children's Hospital.

1 comment:

  1. I can do without the recommendations of the harvard grades. I do not have anything against the harvard grades its just they do not have any better idea as to waht the future of the stock of a company holds than anyone else.