Odd Lots Eugene Fama and David Booth on the Birth of Modern Finance
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Mar 6, 2025 
Eugene Fama, a Nobel Laureate in Economic Sciences, and David Booth, founder of Dimensional Fund Advisors, dive into the tumultuous 1970s market landscape. They discuss the Efficient Market Hypothesis, asserting that markets are generally right and investors can't easily outsmart them. The duo reflects on their influential theories, the rise of passive investing, and how social media complicates market efficiency. They also touch on modern challenges in financial research, the dynamics of stock performance, and the evolving role of growth stocks in today's economy.
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Focus on Risk, Not Stock Picking
- If markets are efficient, focus on dimensions of risk and portfolio selection instead of stock picking.
- Active management persists due to the belief in identifying managers with special information.
Fama's Bubble Definition
- Eugene Fama defines a bubble as predictable price drops, which are difficult to identify prospectively.
- He criticizes the loose usage of "bubble" without clear definitions.
Risk Premiums and Market Efficiency
- Market efficiency does not preclude risk premiums, where higher returns compensate for increased risk.
- Confusing market efficiency with risk dimensions is a common misunderstanding.