It has been announced that Eugene F. Fama and Robert J. Shiller (along with Lars Hansen) are sharing the 2013 Nobel Prize in Economic Sciences for their research on how prices of assets, such as stocks, tend to move over time.
Their research goes into fluctuations in risk and risk attitudes.
Essentially, Professor Fama's work holds that it is difficult to predict price movements in the short run, a conclusion that contributed to the relatively recent development of the popular stock-index funds. Conversely, later work by Shiller focused on longer-run price swings and the extent that they could be explained by such fundamental features as dividend payouts on stocks and the risk appetite of investors. These are obviously competing economic and market theories.
Professor Fama's research in the late 1960s and the early 1970s showed, according to Peter Englund ''how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day's or a week's time.'' Here, the obvious contention is that investors should invest in a broad configuration of assets (that is, presumably, an index fund).
On the other hand, Professor Shiller in the 1980s, contended that it is easier to predict prices over the long term, after finding that equity prices fluctuate more than changes in a company's dividends would suggest.
Overall, this is the long-standing debate over the efficient market theory. This theory argues that the market prices in all available information and that investors cannot beat the stock market on a consistent basis because of that.
Which contention makes more sense? It has long been the Value Line belief, based on our research, that stock markets and stock prices are not efficient, and that emotion and non-quantifiable ''noise'' gets in the way to distort things. And our long-term record, based on the better performance of the stocks ranked 1 (Highest) or 2 (Above Average) for Timeliness, would seem to bear this out. Our Ranking System for Timeliness has been in existence too long (since 1965) for this position to be a fleeting aberration. Individuals, and by extension institutions, are too irrational and too prone to so-called seat of the pants judgments to take and maintain a purely objective view of the stock market. We clearly need an effective methodology to exceed the market's average or median returns over time. Our Timeliness Ranking System is an effective and non-judgmental approach to breaking down the so-called efficient market theory clung to by Professor Fama and other economic and market theorists.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.