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Eight Heroes

Adam M. Grossman

A CURIOUS THING happened in Stockholm in 2013. The Royal Swedish Academy of Sciences awarded the Nobel Prize in economics to three academics who had developed theories about stock prices. What was odd was that two of the recipients—Eugene Fama and Robert Shiller—couldn’t have been more opposed in their viewpoints.

Fama believes that stock prices are always rational and that there’s no such thing as a market bubble. Shiller believes that stock prices are often irrational and that bubbles do occur. And yet the Nobel Committee gave them both the same prestigious award, implying that their conclusions were equally valid.

This always struck me as nonsensical. Either the Earth is flat or it’s round. It can’t be both. In the case of stock prices, the data are clear: Shiller’s point of view makes more sense. Stock prices get out of whack all the time. Investors overreact and bubbles form frequently. Even Fama himself has halfheartedly acknowledged this, saying that his theory is just “a model” and that it is “difficult to prove” and “not always true.”

Why am I hung up on this? A Nobel Prize is like a Good Housekeeping seal of approval. In my opinion, the Swedish Academy did a disservice to individual investors by validating two opposing theories. It’s like telling people that you can eat a balanced diet or that you can eat cheeseburgers at every meal, and that both approaches are equally valid.

From my point of view, as a financial advisor, the people most deserving of awards are those who have done the most to educate—and advocate for—individual investors. They are the true heroes in personal finance. If you are looking to develop your own personal finance knowledge and skills, here are eight individuals who, I think, deserve your attention:

Ben Graham. Well known as Warren Buffett’s teacher and mentor, Graham also shared his wisdom in a set of timeless books. Most memorably, in The Intelligent Investor, Graham explains investor psychology using an invented character called Mr. Market. What he says about investing is as true today as it was when the book was published in 1949.

Warren Buffett. Revered for his investment skills, Buffett is a hero in my book for the efforts he has made to educate individual investors. In each of his annual letters to shareholders, he devotes space to providing investment advice for ordinary individuals. It’s an incredible public service. You can find 40 years’ worth of Buffett’s letters on his website.

David Swensen. As the longtime manager of the top-performing university endowment, Yale University’s David Swensen knows a thing or two about beating the market. But he also knows that individuals aren’t afforded the same investment opportunities as giant universities. It’s an important point: Yes, you can make a fortune in hedge funds and other exotic investments, but only if your business card has Harvard or Yale on it. Swensen’s book Unconventional Success lays out the argument in clear terms.

John Bogle. Vanguard Group founder Jack Bogle started one of the first index funds in 1976. Even today, at age 89, he does more than almost anyone to articulate for consumers the benefits of keeping costs low. And his company has been extremely effective at pressuring all of its competitors to lower prices. This has benefited consumers immeasurably. Bogle has written several books. I would recommend Enough or The Little Book of Common Sense Investing.

Terrance Odean. A finance professor at the University of California at Berkeley, Terry Odean is not a household name, but he ought to be. He conducted a series of studies that examined the behavior of individual investors, often in conjunction with fellow academic Brad Barber. While many people say that it’s difficult to beat the market, Odean proved it, by studying the results of thousands of individual brokerage accounts. But he didn’t stop there. More recently, Odean produced an educational—and entertaining—series of videos, which are available at no cost on YouTube. If you watch the one entitled Save Early, Save Now, be sure to stick around for the final 13 seconds.

Seth Klarman. In addition to being one of the world’s most successful hedge fund managers, Klarman has done the best job, in my view, of debunking the flawed-but-standard textbook notion that an investment’s risk can be summarized in one number. Klarman’s book is out of print and sells for about $1,000 on eBay. But you can learn a lot from interviews that he has given over the years, including this YouTube video.

Howard Marks. The founder of Los Angeles-based Oaktree Capital, Marks is an incredibly clear thinker and shares his commonsense ideas with the public in periodic memos. Like Klarman, Marks departs from the less-than-useful textbook approach to thinking about risk. Especially in the 10th year of a bull market, I would recommend subscribing to Marks’s memos, which are available at no cost on Oaktree’s website.

Nassim Nicholas Taleb. A retired trader, Taleb uses the analogy of a black swan—a phenomenon that is very rare but does actually exist—to make an important point: Just because something has never happened before, or just because you have never seen it yourself, doesn’t mean that it can’t happen. Taleb’s bestselling book The Black Swan deserves a place on your bookshelf. Yes, the past is a guide to the future. But it is not a perfect roadmap.

Adam M. Grossman’s previous articles include Separated at BirthNon ProphetStress Test and All of the Above. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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Joe Spr
1 year ago

“Either the Earth is flat or it’s round. It can’t be both.”
Is light a wave or a particle?
If you are not familiar with this question, the answer is that is it both.

I doubt that they both won the Nobel prize because they proved their theories to be “true.” IMHO, they won the prizes because of the depth of the research and thinking that went into their theories.

SanLouisKid
SanLouisKid
6 years ago

In the book The Investor’s Anthology by Charles D. Ellis and James R. Vertin, they mention many names (Buffett, Graham, Keynes, etc.) and also Fred J. Young. (I have my copy of the book autographed by both Buffett and Young.) It turns out they crossed paths in the late 1950s and then several times over the years as Buffett did business with a bank that Fred worked for in Chicago. Fred did very, very well financially and shared his net worth with me. I told him he could have done even better if he’d just given his money to Warren. He replied, “Well Rick, I thought I was smarter than Warren.” Fred wrote the book How To Get Rich and Stay Rich. (Out of print, but sometimes available used.)

Jonathan Clements
Jonathan Clements
6 years ago
Reply to  SanLouisKid

Great story! Thanks for sharing it.

Laura Bignami
Laura Bignami
6 years ago

If markets are not efficient doesn’t this mean that it’s possible to beat them for example by picking the right stocks, or by timing the market? Yet this website advocates using index funds and not trying to time the market. Why is that?
Would you say that it is because, even though money managers with the skills to beat the maret exist (if like you say it’s not efficient), for individual investors it’s not easy or possible to know who they are in advance?

Russ D'Italia
Russ D'Italia
6 years ago
Reply to  Laura Bignami

I think the standard answer is what you suggest. After the fact we can see that 20% of fortune tellers can see the future, but predicting who they are before hand is rather difficult. Also, even if you can find a great prognosticator, she has to do better than what it costs to hire her, as well as pay the costs and taxes on the churn needed to follow her advice. My own advice, which I hereby offer to the Noble Committee for consideration on my candidacy, is that when you find a group of humans who can beat the market, you also have to pick the one without frailties and the one who keeps his eye on the ball long after he is famous and rich. Humans being humans, you might find that wealth and fame have a corrupting influence and that wild women and cocaine are lures that are even more inviting than a close pursuit of market leaders. But indexes stay true, especially for the long terms required by serious investors. It isn’t how well you have done for me lately, it’s how well will you do for 40 years. And it turns out there are few Warren Buffetts.

Jonathan Clements
Jonathan Clements
6 years ago
Reply to  Russ D'Italia

The added issue with successful managers is asset bloat. It’s far more difficult to manage $100 billon than $100 million. Meanwhile, I second your nomination, should anybody from Sweden happen to be reading this.

Jonathan Clements
Jonathan Clements
6 years ago
Reply to  Laura Bignami

Great questions. I can’t speak for Adam, but here are my four thoughts. First, I don’t believe markets are perfectly efficient, but they’re efficient enough that it’s extraordinarily hard to earn market-beating returns. Second, even if markets weren’t efficient at all, most investors would still lag behind the market after costs. That’s just the brutal math of investing. Third, while some investors have shown the ability to beat the market over reasonably long periods, that past performance isn’t at all predictive when it to future results. Fourth, some of the folks that Adam cites above may be notable for their investment performance, but all of them are notable for helping investors to think about money management more clearly.

David Powell
David Powell
6 years ago

+1 for Bernstein (and Clements). Grossman’s pretty darned good so far too!

Roboticus Aquarius
Roboticus Aquarius
6 years ago

I think of the two theories as the difference between a low fat diet and a low carbohydrate diet. Both are models that can work, and what’s most important is which one works best for you. Investing is an arena where one-size fits all solutions tend to be most problematic, imho. I have a TAA portfolio, because I love to tinker, but the actual allocation changes are very modest – so the gap to a buy and hold and rebalance model is actually very small. I get to satisfy my need to act, but the self-imposed rules I use prevent large mistakes; both those things make me happy and help me ‘stay the course’ in any meaningful definition of the phrase.

I’m not sure either model is the right way to look at the market, but they are both useful ways to think about it. I happen to think that efficiency and accuracy are not the same thing, and that provides opportunity occasionally if you think you have an edge – but it’s not a simple thing to grab that opportunity. This recalls ‘A random walk on Wall Street’. I don’t believe that stock prices are a random walk, but it’s a very useful model because prices often do resemble a random walk closely enough.

I would nominate William Bernstein for at least 2nd Tier and perhaps deserving of a spot on this list. Best known for ‘The Three Pillars of Investing’, I actually prefer ‘The Intelligent Asset Allocator’, named in homage to Graham. He and Swensen influenced me a lot. I also appreciate the links to the resources I haven’t yet dug into as deeply.

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