Tape 161 - Challenge to investment judgment
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Host | Welcome once again as MIT professor Paul Samuelson | 0:01 |
discusses the current economic scene. | 0:04 | |
This series is produced by Instructional Dynamics | 0:06 | |
Incorporated. | 0:09 | |
This program was recorded August 27. | 0:10 | |
Paul Samuelson | I'd like today to talk about a problem | 0:14 |
of long run importance. | 0:17 | |
I'm constantly being asked, what is this notion that the | 0:19 | |
stock market accomplishes something? | 0:25 | |
Isn't it manifestly a case of hysteria and enthusiasm | 0:28 | |
at the moment that I'm speaking in August of 1974? | 0:35 | |
The Dow Jones Industrial averages of 30 stocks, stocks | 0:42 | |
that people look at, have at least momentarily broken down | 0:48 | |
through 700, below 700. | 0:54 | |
They were 1,050. | 0:56 | |
Adjusted two or three years back, the American economy | 0:58 | |
hasn't changed very much, but the quotations on those stocks | 1:02 | |
have certainly changed. | 1:05 | |
Indeed, they're right now as low as they were back at | 1:08 | |
the depths of the 1970 recession. | 1:14 | |
And you could go back to the middle 1960s to find | 1:17 | |
the Dow Jones as low as this. | 1:25 | |
They're broad categories of stocks, public utility stocks, | 1:28 | |
for example, which are right now where they were 13 or 15 | 1:31 | |
years ago. | 1:35 | |
Now, that being the case how can a economist seriously argue | 1:38 | |
that the something like the random walk hypothesis holds | 1:43 | |
for the stock market? | 1:49 | |
How can he argue that all of the best information is | 1:52 | |
constantly being processed by the best intelligence | 1:56 | |
and is constantly being turned into some of kind of correct | 2:02 | |
pricing? | 2:06 | |
That's the question that I'm asked repeatedly, and I'd like | 2:08 | |
therefore to discuss this fundamental problem to you. | 2:13 | |
It's not only a fundamental problem in personal finance, | 2:18 | |
but it's a problem of great moment for how we run | 2:21 | |
the economic system. | 2:25 | |
Because if the stock market is just a casino, that doesn't | 2:26 | |
accomplish very much, then if we wiped it out under some | 2:29 | |
puritanical laws, there wouldn't be much harm done. | 2:35 | |
On the other hand, if it really is accomplishing a lot, | 2:39 | |
it would be a tragedy to let temporary populist bouts | 2:42 | |
of opposition to such an institution lead to the euthanasia | 2:49 | |
of it. | 2:55 | |
For this purpose, I was asked to prepare an article for | 2:57 | |
a new journal. | 3:05 | |
This is the new journal called the Journal of Portfolio | 3:07 | |
Decision Making. | 3:11 | |
It's to bridge the gap between the academic world | 3:13 | |
of finance, the sort of thing that assistant and associate | 3:18 | |
professors of finance in the graduate business schools | 3:21 | |
of this country write about and study. | 3:25 | |
And, the actual practical world where institutional money | 3:29 | |
managers are putting their reputations on the line each day | 3:35 | |
in trying to perform a little bit better than a random dog | 3:41 | |
could do, and a little bit better than the best of their | 3:51 | |
colleagues could do. | 3:56 | |
Let me say in the beginning, that this particular magazine | 4:00 | |
or journal is, as I understand it, being published by | 4:05 | |
the same publishers who published the Institutional | 4:10 | |
Investor, which has been a very successful magazine | 4:13 | |
for people in the money market. | 4:18 | |
The Institutional Investor group have sponsored innumerable | 4:20 | |
conferences in New York, and those conferences, I imagine | 4:27 | |
don't come cheap, and they're attended by really thousands | 4:33 | |
of people. | 4:38 | |
No doubt there's an ebb and flow. | 4:39 | |
It's no secret that there are a lot of holes in people's | 4:42 | |
shoes in Wall Street today, so instead of each company | 4:45 | |
taking 20 tickets to a conference like this they might | 4:50 | |
economize and send just three people there, so the | 4:56 | |
attendances are down, but perhaps the loss to the commercial | 4:59 | |
world is a gain to scholarship and so this may help | 5:05 | |
to explain why this new journal is being started. | 5:10 | |
It's new editor, I think they're lucky in their choice | 5:13 | |
of him, it's Peter Bernstein, Peter Bernstein is a | 5:17 | |
well-known economist who happens also to be a well-known | 5:20 | |
investment counselor. | 5:25 | |
He was a graduate of Harvard College and taught at Williams | 5:27 | |
College and then was an economist for New York Bank, | 5:33 | |
I think the amalgam made it Workers' Bank, and then | 5:36 | |
he went into his father's firm, rather famous firm | 5:41 | |
of Bernstein McColley. | 5:45 | |
Fred McColley was a very emminent researcher at the National | 5:48 | |
Bureau, did some of the first work on the relationship | 5:52 | |
between term structures of interest rate. | 5:55 | |
And that prospered and finally became part of Hayden Stone | 6:02 | |
and more recently, I believe that organization continues | 6:06 | |
with Hayden Stone but Peter Bernstein has gone back | 6:10 | |
on his own and I think he's doing some consulting for | 6:13 | |
a large foundations. | 6:17 | |
So, you have a man who has a foot in both worlds. | 6:20 | |
The new issue will be available to subscribers, I don't | 6:25 | |
think you can see it on your friendly news stand unless | 6:29 | |
you have an unusually academic news stand. | 6:33 | |
Sometime I suppose this fall because I know that the first | 6:38 | |
edition is now in the press. | 6:44 | |
Well, when invited to contribute to the first issue, | 6:47 | |
I thought I would and I thought I'd really throw | 6:50 | |
the gauntlet down to the practical man. | 6:53 | |
So, let me share with you the rather brief views that I | 6:55 | |
stated in this original article. | 7:03 | |
No mathematical equations in the article. | 7:05 | |
I suppose that's uncharacteristic of an academic economist | 7:09 | |
and it's written in a casual style, but it's meant | 7:12 | |
seriously. | 7:17 | |
The title that I gave is Challenge To Judgment. | 7:18 | |
That is a challenge to the notion that discretionary | 7:22 | |
security analysis and portfolio decision making does | 7:26 | |
accomplish something. | 7:30 | |
I begin by pointing out that there, there are now two | 7:33 | |
worlds. | 7:36 | |
Once upon a time, there was one world of investments. | 7:37 | |
It was the world of practical operators in the stock | 7:40 | |
markets and the bond markets. | 7:43 | |
But now there are two worlds. | 7:45 | |
There's the same old practical world, of course, a little | 7:46 | |
bit the worse for wear, and the new world of the academics | 7:48 | |
with their mathematical stochastic processes. | 7:52 | |
Stochastic process means they probabilistic analysis. | 7:56 | |
These worlds it's fair to say are still light years apart. | 8:01 | |
They're as far apart as the distance from New York | 8:06 | |
to Cambridge or New York to Berkeley, or perhaps | 8:09 | |
exaggerating a bit, they're as far apart as the vast width | 8:13 | |
of the Charles River between the Harvard Business School | 8:17 | |
and the Harvard Yard where the academic statisticians tend | 8:20 | |
to reside. | 8:25 | |
Now perhaps there has been in recent years some discernible | 8:27 | |
rate of convergence between this disparate worlds but | 8:30 | |
in any case I guess I would expect the future to show | 8:34 | |
some further approach between them. | 8:37 | |
But let me reveal my own bias. | 8:40 | |
I think the ball is in the court of the practical men. | 8:44 | |
It is the turn of the mountain to take the first step | 8:47 | |
towards the theoretical Mohammed. | 8:50 | |
In other words, the convergence I think is going to have | 8:52 | |
to take place between the practical men, coming closer | 8:55 | |
to the academics than to have the academics get closer | 8:58 | |
to the practical men. | 9:02 | |
Now that shows how academic I am. | 9:03 | |
Well let me explain. | 9:08 | |
If you oversimplify the debate, it can be put in the form | 9:10 | |
of the following simple question | 9:14 | |
Resolved that the best of money managers cannot | 9:16 | |
be demonstrated to be able to deliver the goods of superior | 9:21 | |
portfolio selection performance. | 9:24 | |
Any jury that reviews the evidence, and I think there is | 9:29 | |
a great deal of relevant evidence, must at least come out | 9:32 | |
with the Scottish verdict, superior investment performance | 9:37 | |
is unproved. | 9:41 | |
In our system of jurisprudence, the jury finds you guilty | 9:43 | |
or unguilty, or not guilty, innocent. | 9:46 | |
But in the Scottish system it used to be the case at least | 9:49 | |
that there was an intermediate category called unproved. | 9:54 | |
Well I think that superior investment performance is to | 9:58 | |
say the least unproved. | 10:01 | |
Now let me clarify. | 10:04 | |
I don't want to be misunderstood. | 10:06 | |
It's true, the Morgan Guarantee Bank trust department | 10:08 | |
did do better in certain years than the average mutual fund. | 10:12 | |
That's demonstrable fact. | 10:16 | |
It's not in doubt. | 10:19 | |
It isn't denied either that, say, the T. Rowe Price | 10:21 | |
organization achieved greater increments of wealth in many | 10:25 | |
years than did many other organizations. | 10:30 | |
And both of these may well turn out to perform better than | 10:34 | |
the market as a whole in the future. | 10:37 | |
Yet, remember this. | 10:41 | |
There were years when the Dreyfus Fund or the Enterprise | 10:43 | |
Fund or the Fidelity Funds or, dare I say it, Chang, | 10:46 | |
Chang's portfolios, they seem greatly to outperform | 10:53 | |
the mob. | 10:59 | |
And then again, there were other years when they didn't. | 11:00 | |
And the same thing is true about the Morgan Guarantee Trust | 11:02 | |
portfolio. | 11:07 | |
It's no secret that the last year or so has not been great | 11:08 | |
for the first tier of the market where the Morgan people | 11:12 | |
have primarily been. | 11:17 | |
They can tell you how they've done on Avon and Polaroid | 11:17 | |
and perhaps Xerox and IBM and the story is not the great | 11:22 | |
triumphant story that it used to be. | 11:29 | |
Similarly, with respect to T. Rowe Price, they still, | 11:32 | |
it still is an estimable organization, but the confidence | 11:37 | |
in which an observer can say that that organization has | 11:43 | |
recently been outperforming the rest or the averages must | 11:49 | |
very much be diminished. | 11:55 | |
What at issue, what's at issue, is not whether as a matter | 11:59 | |
of logic or root fact, that could exist at subset of | 12:04 | |
decision makers in the markets who are capable of doing | 12:10 | |
better than the averages on a repeatable sustainable basis. | 12:13 | |
There's no reason and logic why there shouldn't be a small | 12:18 | |
group of, I won't even call them insiders because that | 12:20 | |
sounds as if they get their extra edge by means of inside | 12:23 | |
information, but there could be a small group of people | 12:31 | |
who are capable of doing better than the averages, then | 12:33 | |
the totals on a repeatable sustainable basis. | 12:37 | |
There's nothing in the mathematics of random walks | 12:41 | |
or Brownian movements, which academic economists apply | 12:44 | |
to the stock market, that A, proves this to be impossible, | 12:48 | |
or B, postulates that it is in fact impossible. | 12:52 | |
In other words, as a matter of logic or a matter of fact. | 12:59 | |
The crucial point though is this. | 13:03 | |
When investigators, and there are a lot of them, a lot | 13:06 | |
of good ones, like Irwin Friend of the Wharton School | 13:08 | |
at the University of Pennsylvania or Jack Trainor, now | 13:13 | |
the editor of the Securities Analyst Journal, or James | 13:17 | |
Laurie at the graduate business school, or Fisher Black | 13:20 | |
and Myron Scholes of the graduate Chicago Business School. | 13:24 | |
Or, it doesn't have to be an academic, any foundation | 13:30 | |
treasurer of fair-minded and serious intent. | 13:33 | |
If they look to identify those minority groups or methods, | 13:39 | |
and endowed with sustainable superior prowess, they seem | 13:43 | |
quite unable to find them. | 13:48 | |
The only honest conclusion then, I think, is to agree, | 13:52 | |
that a loose version of the "efficient market" or random | 13:57 | |
walk unquote hypothesis does accord with the facts | 14:03 | |
of life. | 14:08 | |
Now, this truth, let me emphasize, is a truth about New | 14:10 | |
York. | 14:14 | |
It's also a truth about Chicago and it's a truth about | 14:16 | |
Omaha. | 14:18 | |
And it's as true in New York as it is in Cambridge. | 14:19 | |
If it's true, it's true about the real world, it's not | 14:25 | |
something which is true in the learned papers in the | 14:27 | |
assistant professors of finance or in the PhD theses | 14:33 | |
of graduate students of the business schools. | 14:36 | |
It's either true or it's not true. | 14:38 | |
This doesn't say that many people, even most people, aren't | 14:43 | |
capable of frittering away the funds given them. | 14:48 | |
Most people can be capable of doing worse than the averages | 14:52 | |
or worse than at random. | 14:59 | |
To lose money all you have to do is flip a coin. | 15:02 | |
Buy General Motors on heads and sell it on tails and just | 15:05 | |
keep doing that. | 15:09 | |
That way you'll do worse than the averages. | 15:11 | |
And you'll do worse even in holding General Motors | 15:14 | |
or avoiding it. | 15:17 | |
The money you lose and on that system the odds are | 15:20 | |
overwhelmingly against you. | 15:23 | |
That money will go to lower the losses of your hard-pressed | 15:26 | |
broker. | 15:28 | |
It's not true that it's a zero sum game. | 15:30 | |
That what you lose some other speculator wins because | 15:33 | |
there's a lot of dead weight loss due to just the dead | 15:36 | |
weight of commissions. | 15:42 | |
Similarly, the transaction volume generated by the | 15:45 | |
non-random decisions of the vast majority of the big | 15:48 | |
and small investors who all think they have a flair, | 15:51 | |
but don't demonstrably have it. | 15:56 | |
Most of those transactions serve only to suck economic | 16:00 | |
resources out of useful GNP activities, you name it, | 16:03 | |
(mumbles) and you, whatever you think is useful in the GNP. | 16:09 | |
And puts those resources into brokers, telephone | 16:12 | |
solicitations and into a lot of bookkeeping. | 16:16 | |
Now, this is not a condemnation of market activity. | 16:20 | |
Even if 8 out of ten transactions are wasteful, who's | 16:24 | |
to say which are the two that are not. | 16:27 | |
I went to a retirement dinner for Professor Larry Seltzer | 16:30 | |
of Wayne State University, a very eminent economist who | 16:37 | |
had been there 50 years if you can believe it, and in his | 16:39 | |
nice little speech he quoted one of his professors and said, | 16:47 | |
"All my life what I've been teaching has been half wrong | 16:51 | |
and unfortunately I don't know which half it is." | 16:54 | |
Well, so it can be argued that some transactions are | 16:56 | |
desirable and necessary. | 17:02 | |
But, this is a useful hint to most pension and trust | 17:05 | |
managers that their clients would in all likelihood | 17:10 | |
be ahead if their turnover rates were halved. | 17:13 | |
And their portfolios were more broadly diversified. | 17:17 | |
You might say they also serve who only sit and hold. | 17:22 | |
But, no doubt, the fees that I might earn as a consultant | 17:26 | |
by giving such sensible advice and which portfolio managers | 17:31 | |
might earn by following such prosaic behavior, are less | 17:38 | |
than from trying to give it that old post-college try. | 17:43 | |
What is it that logic can demonstrate? | 17:48 | |
What it can demonstrate is that not everybody, nor even | 17:53 | |
the average person can do better than the comprehensive | 17:56 | |
market averages. | 18:00 | |
That would contradict the tautology that the whole is | 18:03 | |
the sum of its parts. | 18:06 | |
Moreover what statistical probabilistic theory can suggest, | 18:09 | |
this is not a logical theorem, is this. | 18:12 | |
If you select at random a list, of say, a hundred stocks, | 18:16 | |
and if you buy them with weights that are proportional | 18:20 | |
to their respective total outstanding market values, | 18:22 | |
although your sample's performance won't exactly duplicate | 18:27 | |
that of a comprehensive market average, it will by the law | 18:31 | |
of large numbers, come close to doing so. | 18:35 | |
Closer than if you throw a dart at only one stock. | 18:39 | |
But of course, you won't do as well with a sample, even | 18:44 | |
a random sample, of a hundred stocks as you would with 200, | 18:48 | |
300, or using all the stocks that are available in | 18:52 | |
the marketplace. | 18:57 | |
Now, do I really believe what I've been saying? | 19:01 | |
That judgment doesn't help. | 19:04 | |
I'd like to believe otherwise. | 19:08 | |
But a respect for evidence compels me to incline towards | 19:11 | |
the hypothesis. | 19:15 | |
Now it's only a hypothesis, that most portfolio decision | 19:17 | |
makers should go out of business. | 19:21 | |
They should take up plumbing, teach Greek, or just be | 19:24 | |
ordinary corporate executives. | 19:30 | |
Now, even if this advice to drop dead is good advice, | 19:33 | |
it obviously isn't counsel that's going to be eagerly | 19:37 | |
followed. | 19:40 | |
Few people will commit suicide without a push. | 19:41 | |
And fewer still will pay good money to be told to what | 19:45 | |
it is against human nature and self interest to do. | 19:49 | |
It was Ralph Waldo Emerson who said, "The will world beat a | 19:53 | |
path to the door of the man who invents a better mousetrap." | 19:57 | |
Let's amend that, the person that invents a better | 20:01 | |
mousetrap. | 20:04 | |
Well that shows what Emerson knew about economics. | 20:05 | |
The Wells Fargo Bank out on the west coast sent out a trial | 20:09 | |
balloon in the way of a sensible, non-managed fund that | 20:12 | |
embodied essentially the whole market. | 20:18 | |
The Standard and Poor 500 stock. | 20:21 | |
It was even better than that because they enabled you to | 20:25 | |
mix your own leverage at very low interest rates relative | 20:32 | |
to the market so that sticking with the evidence you could | 20:36 | |
do as well as the market with the sureness, and you could | 20:42 | |
take advantage of the little bit of daylight that seems | 20:47 | |
to be there in the way of the not perfectly equilibrated | 20:50 | |
prices. | 20:55 | |
What I have in mind here, but I don't want to digress | 20:56 | |
too far, is that there is a little bit of evidence, | 20:59 | |
that if you put your money into non-volatile stocks, | 21:03 | |
you think that's the prudent way of investing, but it's | 21:07 | |
the only imprudent way of investing. | 21:10 | |
They do a little bit worse on the average than more volatile | 21:12 | |
stocks. | 21:17 | |
Now you would say, "How is that possible?" | 21:19 | |
The volatile stocks, we're comparing cheese and chalk. | 21:20 | |
They're very volatile, and how can you compare them? | 21:24 | |
Well, the way you compare them is the following. | 21:29 | |
You buy the non-volatile stocks on leverage, so by | 21:32 | |
leveraging up your position you make them just as volatile, | 21:38 | |
as the volatile stocks are without that much leveraging. | 21:42 | |
Then you look at the average rate of return which has | 21:47 | |
actually been earned over the years by a comprehensive | 21:51 | |
portfolio of one as compared to the other, and lo | 21:56 | |
and behold, and this is the only deviation practically | 21:58 | |
from the random walk hypothesis that has ever been observed, | 22:01 | |
and that has lasted as a valid observation, you could do | 22:06 | |
a little bit better in the volatile stocks. | 22:11 | |
Well, I think the Wells Fargo was in a position to take | 22:12 | |
advantage of that. | 22:15 | |
But, alas and alack, I don't believe that the world beat | 22:17 | |
a path to the San Francisco door or Los Angeles door | 22:22 | |
of the Wells Fargo Bank system. | 22:26 | |
There's an organization in Boston, Battery Marts, that has | 22:29 | |
likewise a scheme for matching the averages. | 22:33 | |
All you need is perhaps a few hundred thousand dollars | 22:38 | |
to get into it, and I may be wrong, but I don't have | 22:41 | |
the impression that they're overflowing with inquiries | 22:47 | |
and telephone calls. | 22:51 | |
One of the American Express mutual funds has experimented | 22:53 | |
with establishing an outlet for pension fund money. | 22:59 | |
All you need is a million dollars I believe to get into it. | 23:02 | |
But it's surprising how many, how few are the millions | 23:06 | |
of dollars ready to go into these sensible mousetraps, | 23:11 | |
these sensible instruments. | 23:17 | |
In fact, one's left with the impression and an awful lot | 23:19 | |
of underbrush has been growing up before the doors | 23:21 | |
of these deviance into good sense. | 23:25 | |
Ralph Waldo Emerson, not withstanding. | 23:28 | |
At the very least then, I suggest, some large foundation | 23:32 | |
should set up and in-house portfolio that seeks to track | 23:35 | |
and duplicate the S and P 500 Index. | 23:40 | |
To do this, if only for the purpose, of setting up a naive | 23:44 | |
model against which their own in-house gunslingers | 23:47 | |
can measure their prowess. | 23:50 | |
Instead, as you know, most portfolio committees bolster | 23:52 | |
their self-esteem by showing they have done better than | 23:56 | |
the Valuline 1500 Stock Index. | 23:59 | |
And no wonder, that index being a geometric median index, | 24:02 | |
I can outperform it merely by buying its stocks and | 24:07 | |
its proportions. | 24:10 | |
And I can do so both in down markets and up markets. | 24:13 | |
Since money is only sophisticated enough to grow | 24:17 | |
arithmetically, dollar on top of algebraic dollar. | 24:20 | |
Algebraic dollar because it's loss as well as gains. | 24:23 | |
I've seen the same thing in a recent report, some mutual | 24:26 | |
fund, it shall be nameless, didn't do as well as the | 24:31 | |
Standard and Poor's average, so they pointed out the index, | 24:35 | |
they pointed out they did better than the average stock | 24:40 | |
in the index. | 24:42 | |
Well, they don't realize it, but they've shifted the ground | 24:44 | |
to very close to the geometric mean because, I won't go | 24:47 | |
into the details, it's the law of normal distribution, | 24:52 | |
and anybody who buys all the stocks in the index will | 24:55 | |
do better than the average stock in the index because | 24:58 | |
the stocks that make a gain, make a much larger gain than | 25:00 | |
those which lose on the average because the tail of | 25:05 | |
the distribution is always skewed off to the right. | 25:11 | |
That's true, by the way, in down markets and up markets, | 25:14 | |
but I'd have to state the proposition a little more | 25:16 | |
carefully. | 25:19 | |
Perhaps CREF, which pioneered the variable annuity | 25:20 | |
and the variable pension plan, it's the non-profit | 25:26 | |
organization set up by teachers annuity, perhaps it can | 25:29 | |
be induced to set up an in-house pilot plant operation | 25:35 | |
of an unmanaged diversified fund, but I wouldn't like | 25:39 | |
to bet on it. | 25:41 | |
I've actually suggested to my colleague, Professor Franco | 25:43 | |
Modigliani, who's going to be the president of the American | 25:46 | |
Economic Association, in 1976, that economists might | 25:49 | |
want to put their money where their darts are. | 25:53 | |
That the AEA might, as a service, contemplate setting up for | 25:56 | |
its members, a no load, no management fee, virtually no | 26:00 | |
transaction turnover fund along the Sharpe Mossin Lintner | 26:04 | |
lines of the academic theories. | 26:09 | |
But I daresay there's so little supernumerary wealth | 26:13 | |
to be found among 20,000 economists that you could do better | 26:17 | |
if you tried such a fund among 20,000 chiropractors. | 26:22 | |
For as George Bernard Shaw should have said, those who | 26:27 | |
have don't know, those who know don't have. | 26:31 | |
That's my twist on if you're so smart why ain't you rich. | 26:35 | |
Well now how does one judge the validity of all this | 26:40 | |
I've been asserting? | 26:43 | |
We certainly don't want to replace old, tired dogmas | 26:45 | |
such as be selective in the search for quality with | 26:48 | |
new dogmas. | 26:52 | |
However scientific is their nomenclature. | 26:54 | |
But the sad truth is, that it is precisely those who | 26:58 | |
disagree most with a hypothesis of efficient marketing | 27:01 | |
pricing of stocks, who poo poo beta analysis, and all that. | 27:04 | |
They're the one who are least able to understand the | 27:09 | |
analysis needed to test that hypothesis. | 27:11 | |
What do they do? | 27:15 | |
Well, first they simply assert that it stands to common | 27:16 | |
sense, a great effort to get facts and greater intelligence | 27:19 | |
in analyzing those facts, will pay off in better performance | 27:23 | |
somehow measured. | 27:26 | |
But of course by this logic, the cure for cancer ought | 27:28 | |
to have been found way before 1955. | 27:31 | |
Second, those people always know a man, a bank, or a fund | 27:35 | |
that does do better. | 27:40 | |
But alas, anecdotes don't make science. | 27:42 | |
And once the Wharton School dissertation writers seek | 27:46 | |
to quantify these performers. | 27:49 | |
They have a tendency to evaporate in air, or at least | 27:52 | |
into statistically insignificant T-statistics. | 27:55 | |
Well, let me sum up, I have to do it very briefly. | 28:00 | |
It isn't ordained in heaven, or by any second law | 28:03 | |
of thermodynamics, that a small group of intelligent | 28:05 | |
and informed investors, can't systematically achieve | 28:08 | |
higher mean portfolio gains with lower average | 28:12 | |
variabilities. | 28:15 | |
People who different heights, in their pulchritude and their | 28:16 | |
acidity. | 28:19 | |
Why not in their PQ or performance quotient? | 28:21 | |
Any sheep with a billion dollars has every incentive | 28:24 | |
to track down organizations with such high PQs. | 28:27 | |
But as Frank Knight used to point out, paradoxically, | 28:31 | |
it takes PQ to identify PQ. | 28:34 | |
So, it's not easy to get off the ground. | 28:37 | |
But anyone with special abilities, like those could earn | 28:40 | |
a differential rent on that flair, which we economists | 28:45 | |
call a rent. | 28:48 | |
Those few with extraordinary PQ won't give away such rent | 28:50 | |
to the Ford Foundation or their local bank trust department. | 28:55 | |
They have too high an IQ for that. | 28:59 | |
Like any racetrack tout, they will share it with those | 29:02 | |
well-heeled people who can most benefit from it. | 29:05 | |
It's a mistake though to think that so much money will | 29:10 | |
follow the advice of those best talents. | 29:14 | |
Inevitably as a matter of the logic of competitive arbitrage | 29:16 | |
alone, that the rest of us will be left with white noise, | 29:19 | |
random darts situations, in which every security of | 29:25 | |
the same expected variability has the same expected mean | 29:28 | |
return. | 29:31 | |
Because for the nature of the case, there must always | 29:33 | |
be an important measure of uncertainty and of doubt | 29:36 | |
concerning how much of one's money one can entrust wisely | 29:39 | |
to an advisor whom you only suspect of having exceptional | 29:43 | |
PQ. | 29:46 | |
Many of my academic colleagues fall implicitly in the | 29:48 | |
confusion on this point. | 29:51 | |
They think that the truth efficient market or random walk | 29:53 | |
or more precisely Fair Martingale hypothesis, is established | 29:56 | |
either by logical tautology or with the same empirical | 30:00 | |
uncertainty, the same empirical certainty as the proposition | 30:04 | |
that nickels sell for less than dimes. | 30:08 | |
Well, we're left though, with the fact that if there do | 30:12 | |
exists such talents, they are very rare and they are | 30:19 | |
very hard to identify. | 30:21 | |
This fact, although not an inevitable law, is a brute fact. | 30:24 | |
The ball, as I've said, is in the court of those who doubt | 30:28 | |
the random walk hypothesis. | 30:31 | |
They can dispose of the uncomfortable brute fact, and | 30:33 | |
the only way that any fact is disposed of, by producing | 30:36 | |
brute evidence to the contrary. | 30:40 | |
Host | If you have any comments or questions | 30:43 |
for Professor Samuelson, | 30:45 | |
address them to Instructional Dynamics Incorporated, 450 | 30:46 | |
East Ohio Street, Chicago, Illinois, 60611. | 30:50 |
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