INVESTMENT FALLACIES

Great article on DFA (fund management firm) and Efficient Market Hypothesis...

http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile/

Read it before reading my crazy rant below, please.

I think French, Fama, et al, don't get it. The one thing they're forgetting is the implicit assumption their theory makes - the assumption that everyone WANTS to beat the market. In fact, a large portion of the capital invested is not looking for market level returns. They are more than happy to meet their defined needs and believe it or not, some institutions needs (insurance, annuities, etc) are NOT to beat the market. This is a HUGE source of alpha for everyone else.

I do agree that, in aggregate, investors can't beat the market - since they ARE the market, its a simple fact that the market can't beat itself! Amazing how that truism is made to sound like a proprietary "investment philosophy". And the Nobel committee fell for it.

I also agree that the key beneficiaries of Alpha are the managers themselves. Makes perfect sense - to the victor go the spoils. The fact that investors get ANY benefit from it is justification for the effort - they get that return for taking the risk on the manager, who in turn gets the return for taking the risk on a strategy. If it all works, they get the benefit, and if not, the investors have paid the bulk of the risk for a small slice of the return - and the ones doing the work have gotten paid anyway. It's analogous to owning any business - the workers still get paid if the business loses money. The operator gets a large share of the profit, if any, and the passive investor gets the rest. Not so sure why Bogle and the other grey haired 'geniuses' are so worked up about it.

As for the protagonist in the article, it's clear that this guy is a follower and is just onto the next fad. Since he's called the top of each of the previous ones, lets see if he's done it again....indexing, jeez.