The Father of Modern Financial Science Speaks

This week Mike McClain attended Dimensional Fund Advisor's biannual Advisor College. Here are some of his notes from the conference.

This week I had the opportunity to hear Professor Gene Fama from the University of Chicago, who many regard as the Father of Modern Financial Science. Those that are our clients will remember that Professor Fama authored the Efficient Market Hypothesis and he and Professor Ken French developed the model that explains equity performance.

Professor Fama said that he believed the sub-prime real estate lending "crisis" was likely overstated and he did not believe the impact will be as significant as some are evaluating it to be. Besides, he said, "financial markets are incredibly flexible and adjust to things such as this."

The key to successful investing, according to Professor Fama is to have a disciplined investment strategy, a diversified portfolio, and a long-term perspective. Diversity, he said, "is your buddy."

Ill-fated attempts to time markets, which can't be done consistently, along with shifting investment strategies are two reasons Fama poo-pooed hedge funds. Fees were another one which typically run 2% and 20% of the profits. The riches earned by managers -- whether or not investors do well -- Fama joked had even lured a few of his former students into starting hedge funds.

Fama encouraged conference attendees to keep their clients away from long-term bonds, which research shows do not sufficiently reward investors for the undue risk incurred. "I would personally never buy long-term bonds," Fama said.

Not surprisingly the Father of Modern Financial Science warned, "stay away from active management."

That evening I had the opportunity to have dinner with Scott Burns, the syndicated financial columnist. Scott echoed Professor Fama's comments about hedge funds saying that the lure of hedge funds was more about having something interesting to talk about at cocktail parties than actual performance. Scott's advice was to invest in a diversified asset class portfolio.