Friday, August 05, 2011

The price is right

With the background of a 4% fall on Wall Street and a falling local share market as he kicks off the last day of the FSC Conference, US author of 'Myth of a Rational Market' Justin Fox picked a timely day to discuss whether the markets are driven by rational investors or panicked decisions of a few.

To answer the question Justin takes us on a (not so random) walk through the history of financial thought from Irving Fisher (who in 1928 tipped the market would keep rising - oops) to Harry Markowitz (variance and correlation in asset allocation) and Bill Sharpe (coined the concept of beta).

Eugene Farma wrapped up much of the thinking of the time with the efficient market hypothesis stating that the market did a pretty good job given that even smart, professional money managers, with access to alot of information, fail to beat the market.

The explanation - it's hard for these professional managers to beat the market as they are usually managing other people's money and it is usually the moment that there is an opportunity in the market that is the hardest time to get others to invest.

Does the efficient market hypothesis hold up? Yes it is still very hard to beat the market but not necessarily because the market is rational or right but for a host of reasons.

So what financial markets theories didn't hold up?

  • The price is right - we don't know!
  • We can value risk
  • Financial markets are stable
  • Corporations should do what markets say - share price should drive decisions. 
What next for global markets? In the words of J.P. Morgan (the man not the company) - it will fluctuate!

Now back to the "carnage" of todays market - rational or not? 

Guest blogger Paul Cheal is attending the Financial Services Council annual conference on the Gold Coast, along with BlueChip Communication's Carden Calder and Bruce Madden 

No comments:

Post a Comment

Thanks for reading. Constructive and relevant comments welcome!