Fama - French thoughts

[AbAdvisor]

Hoping to be the first advisor to post, here are some of my random thoughts:

One of the best things about dealing with DFA is that I have had several opportunities to meet and hear presentations from Gene Fama Sr. and Ken French. Previously these fellows were just names in my CFA texts. What I find interesting are the common misconceptions about their thoughts on their own work.

I've seen much written to indicate that these guys believe markets are perfectly efficient. This is not true. They are very forthright in stating that EMH is a model, and as all models it is inherently false. It is not reality - reality is far to complex for simple models, but the model is helpful in understanding certain things. Ken French figures that markets are maybe 80% efficient.

He talks about an 'efficient amount of inefficiency'. There must be enough inefficiency in the system that some people can profitably exploit it and move prices toward being more correct. So it must be the case that some active management can generate positive alpha. He just doesn't know who those people are; and the time expense and risk in trying to identify them is not worthwhile so most people are probably better off going passive.

Likewise their multi factor models of security returns are false; but useful in guiding investment decsion making. Momentum effects are particularly embarrassing for the multifactor models. They believe that better models will come along in the future to replace theirs; and will probably come from the field of behavioural finance. This makes sense to me, since markets are the sum of millions of individual behaviours driven by more than just dispassionate number crunching.

So the efficient market hypothesis and the multi factor models of security returns are false; but they're the best we've got right now so that's what I'm going with.

[Shakespeare]

Thank you for your post and welcome to FWF!

I agree - based mainly on my own observations - that markets are mostly, not perfectly, efficient. I also think that most people should not try to take advantage of such inefficiencies, and are better off in a fund or ETF.

With respect to the Canadian market, however, there has historically been a significant large-cap value advantage. Whether that advantage persists is anybody's guess, but it is significant enough that I believe it's worth using a value approach. Since TD's value ETF may not survive, that means active (or 'semi-active') funds like those offered PH&N, Saxon, or DFA, or individual stock picking (banks, lifecos) has a place in many Canadian investor's portfolios.

[peter]

If one would characterize the TSX in terms of style a case could be made for large value rather than large blend. In the absence of Nortel as major stock TAV and TTF appear rather similar.

[George$]

About DFA. Over at Vanguard Diehards (at Morningstar)
- there have been numerous threads about the pros and cons of FDA, with folks like Rick Ferri, Larry Swedroe, Jeff Troutner etc. (I don't have a specific thread link handy but I've read numerous ones over the years.)

The DFA funds are interesting but the extra 1% or so to the advisor would turn me away. Certainly compared to average Fidelity or AIC like funds they are very good.

[Bylo Selhi]

The DFA funds are interesting but the extra 1% or so to the advisor would turn me away.

Not every DFA advisor charges 1%. Rick Ferri charges 25bp or less. Steve Evanson charges a flat $750 to $1,500 per year regardless of portfolio size. Both have relatively high minimum account size. Both claim to be "full service", i.e. they're not just DFA order takers.

Dunno if there's anyone in Canada who offers something similar.

[Bylo Selhi]

Another DFA advisor, Hebner offers a 12-step program for active management "addicts" by way of a "coffee table" book. Perhaps an appropriate Christmas present for one's market-timing friends

The art of low-cost investing [Liberated Post, 19Nov05]

Hebner's basic premise is 'capitalism works' and retail investors can get the fruits of capitalism by investing in the various stock market indexes for the long term. 'The only time you should sell is if you come to the conclusion capitalism does not work, or if you need the money,' he said in an interview.