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Step 2- Nobel Laureates

index funds

 

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Step 2 - Introduction

Welcome to Step 2, where the evolution of modern finance is discussed. Peter L. Bernstein provides the inspiration for this step in his two books, Capital Ideas, The Improbable Origins of Modern Wall Street and Against the Gods, The Remarkable Story of Risk. Both are recommended as supplemental sources to this 12-Step Program.

A review of the collective research of these Nobel Prize recipients and other financial academics shows a comparison between what the average active investor understands about the risks and rewards of the global equities market and the academics’ three hundred and forty-five years of unbiased, rigorous, and empirical research. When active investors can accept the fact that there is a vast difference, then they are on the road to recovery. Although this step is titled Nobel Laureates, numerous academics who have researched the stock market but did not get a Nobel Prize will also be discussed. These researchers, including the Nobel Laureates, continue to build and improve on the research of others.
Do you own or plan to own actively managed mutual funds?
Do you think that you can pick stocks that outperform a market?
Do you think that there are times to be in a market and times to be out of a market? In other words, do you try to time the market?
Do you think that actively managed mutual funds with the best track records are the ones to buy?
Do you think that you can predict when large value will outperform large growth stocks?
Do you believe that NOW is the best time to invest in certain sectors, such as ealthcare, technology, large cap or small cap stocks?
Do you invest without considering your Risk Capacity™?
If you own index funds, are you primarily invested in the S&P 500, thinking you are sufficiently diversified?
Do you keep a stash of Rolaids close at hand?
Have you invested without first reading the academic research that explains how the market works?

 

Step 2-Quotes
Peter LynchQuestion: So investors shouldn't delude themselves about beating the market? Answer: "They're just not going to do it. It's just not going to happen."

Daniel Kahneman, Nobel Laureate in Economics, 2002, Investors Can't Beat Market, Jan 2, 2002, Investors Can't Beat Market, Jan 2, 2002
" Most of my investments are in equity index funds." BusinessWeek and "Why pay people to gamble with your money?"


The Parable of Money Managers - William F. Sharpe, Nobel Laureate in Economics, 1990
Nobel Laureate William F. Sharpe" Sooner than I dared expect, my explicit prayer has been answered. There is coming to market... something called the First Index Investment Trust.... offering extremely low portfolio turnover; and best of all, giving the broadest diversification needed to maximize mean return with minimum portfolio variance and volatility." Newsweek Magazine, August 1976, also "It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office. "

Professor Paul A. Samuelson, Massachusetts Institute of Technology, Economist, Nobel Laureate in Economics, 1970
Nobel Laureate William F. SharpeQuestion: I wonder if I might ask you, ...how do you think people should invest for the future...? Should they buy index funds? Answer: Absolutely. I have often said, and I know this will get some of your readers mad, that any pension fund manager who doesn't have the vast majority-and I mean 70% or 80% of his or her portfolio-in passive investments is guilty of malfeasance, nonfeasance or some other kind of bad feasance! There's just no sense for most of them to have anything but a passive investment policy.

An Interview with Merton Miller, Investment Gurus, by Peter Tanous, February 1997, Merton Miller, Nobel Laureate in Economics, 1990

Step 2-Definitions

How is the Nobel Prize in Economic Sciences Awarded?

The Nobel Prize is perhaps the most globally recognized honor in each of the fields in which it is presented. To find out what a challenge it is to obtain, you can go to the official web site, or keep reading! The Nobel Internet archive is also a great resource.

Each year the category committees send individual proposals to thousands of scientists, members of academies, and university professors in numerous countries, asking them to nominate Nobel Prize candidates for the coming year. Those considered competent by these committees to submit nominations are chosen in such a way that as many countries and universities as possible will be represented.

Nominations received by each committee are then evaluated with the help of specially appointed experts. When the committees have made their selection among the nominated candidates and have presented their recommendations to the prize awarding institutions, a vote is taken for the final choice of Laureates.

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is awarded at the Prize Awarding Ceremony at the Concert Hall in Stockholm, Sweden, on every December 10th, the anniversary of Alfred Nobel's death.

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