HEROES-Eugene Fama

Gene Fama is a Chicago School economist, a co-founder of Dimensional Fund Advisors, and a windsurfer. His fame and infamy derive from his groundbreaking work on Random Walk Theory and the Efficient Market Hypothesis. He is both loved and hated for this. To me, he is a hero.

Fama changed the world when he used computer technology to crunch the data to come to the conclusion that beating the stock market was a sucker's game. Basically, no one anywhere at anytime is able to beat the market beyond what someone could do by pure chance. The theory Fama proffered was that the market was like a giant computer reflecting all available information in the prices. No one could get an edge. This goes against the conventional Wall Street wisdom that markets are inefficient and skilled market operators can exploit these inefficiencies for profit on a consistent basis. Unfortunately, the facts say otherwise.

Fama is proven correct year after year. Critics of the EMH point to bubbles or to Warren Buffett. Yet, the evidence is on Fama's side. Investors do better with passive investing. Buy index funds.

The EMH may be discredited in the future. Fama might have it wrong. But so far, you would do better betting with Fama than betting against him. Fama has many critics, but their livelihoods depend on him being wrong. All I know is that I don't waste my time with stockpickers or stockpicking. I just take the market return. This frees up time to do things like windsurfing.

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