Saturday, January 20, 2007

Don’t listen to economists if you want to beat the market

by Berly


I just come across an article in recent issue (may need subscription) of The Economist where:

"... according to preliminary numbers from the National Association of College and University Business Officers (NACUBO) and TIAA-CREF, a financial-services group, university endowments made an average return of 10.7% in the year to June 30th 2006, net of fees and expenses.

Keep in mind that US has low inflation and low interest rate, thus ten percent is quite high rate of return. Elite universities received a lot of donation and endowment from their alumni (do you know there is a Liem Sioe Liong Chair in Wharton Business School that Anthony Salim attended?)

Harvard and Yale have some $50 billion, but it is MIT that excel in giving a run for the money. The engineering institute get 23 % return on investment, winning by a nose from Yale (29,9%)

Top US University certainly have the brainpower (read: top economists prof) to manage the hefty fund they received from wealthy alumni, right?

Wrong!

…Alumni with Wall Street experience are encouraged not only to donate money but also to sit on investment committees … The brainpower on tap at the university itself is not always as useful. According to one former Harvard official, its endowment fund has done so well because it has avoided taking advice from the economics faculty

There you have it folks. It is either we need to look for alternative to efficient market hypothesis, the mainstream thought in finance, or you should not listen to economists for financial advice in the first place.

5 comments:

Anonymous said...

Well maybe Economists go a less risky investment route than engineer, because they know their goal is keep their institute's finances in a healthy condition and not necessarily aim for extremely volatile investment strategies which may or may not yield extreme profits.

(Something which pension fund managers lost sight of a few years ago - to disastrous effect)

The point is: we don't know each investment fund's value at risk etc, beta etc. to make any appraisal of their investment strategies.

Anonymous said...

Berly...

And you call "the statement of former harvard administrator" as scientifically convincing evidence to support your title?

Please, do not jump into conclusion that fast. You could do better than that.

Best

berly said...

John Orford:

Thank for stopping by. Yup, the article also mention that the long term view (similar to Warren Buffet's long view) instead of next quarter earning report is one of the key of the stellar performance.

But I am aiming more for a critical assessment of rationality assumption in economics and finance that currently employ by mainstream and taught at Ivy League universities.

If all economic agents are fully rational and no asymmetric information problem then only new information (or rumour of) can move the market. But the implied assumption that all agents used the same model and will came up with the same action if presented with similar problems which is not close to realism or common found.

Behavioral finance in my opinion can better suggest description and prediction of efficient market and rational agents than the standard model in the irregular event (panic, meltdown, irrational exuberance etc). George Soros is a highly successful market trader that has his own theory (reflexivity) on market by (read his fascinating Alchemy of Finance)

Anonymous/Best:

The article is from The Economics which I assume would be careful in choosing sources. Anonymous source is a common practice in journalism to protect the source and the former Harvard administrator is likely don’t want to offend the Harvard professors and faculty members.

Of course the article did not mentioned whether it is a long-time practice or newly instituted. Or whether it is only in Harvard or a nation-wide procedure.

But taking the quote as it is, the $25.9 billion of Harvard endowment is manage largely, if not entirely, without the direct involvement of top finance professors from Harvard Business School.

Anonymous said...

if u wanna make a profit dont ask an economist... ask a businessman... first, economists are more concern about growth and how money affects it - there are also stochastic concerns about this issue... second, in a maximization problem the only relevant function in profit is price... so there it is...

investohappy said...

I'm a new trader in stock market. But my return is above 100% just for few months.

Do you want to beat the market???
Please listen to good trader/investor/speculator...

They know little about economics theory, but they know how to beat the market...