George Morgan's Blog, page 17

Simple Works

Have you seen the TV commercial where a man is talking to some kids and asks them which is better, slower or faster? The kids scream faster. Then he asks them, which is better, doing one thing or doing two things? They scream two. I don’t remember the product the commercial is selling, but, to me this is why many investors find it hard to accept the simple index fund approach to investing. We have been conditioned to think that our ever expanding technology makes complex better. In the invest...

Greenspan On Animal Spirits

Former Federal Reserve Chairman Alan Greenspan has a new kiss and tell all book out on the market, entitled “The Map and the Territory.” Its theme is a review of the policies he espoused during his tenure at the Fed and an assessment of how effective they were. Greenspan considers himself a mathematician, not a psychologist, and when he looked back on the subprime crisis he was shocked at the inability of Fed's mathematical models to predict the bubble and its subsequent bursting. The more he...

Jason's Nobel Insights

In this Saturday’s edition of the Wall Street Journal, Jason Zweig adds his insight into the importance of the recent Nobel Prize awards for economics. His first observation is that the main lesson from this announcement “should be humility about anyone’s market forecasting ability, especially your own.” His second observation is that Fama sees the markets as efficient, while Shiller sees them more as irrational as efficient. His third comment was a revelation to me. Fama and Dartmouth Colleg...

Wall Street And The Internet

This week I have been lecturing to my university class about efficient markets. As I was preparing my lecture notes, I reflected back on my fifty years spent observing the market and I can see that over time markets have become more and more efficient. The key to this increasing efficiency is the internet and the way that the Financial Services Industry has embraced it. Four decades ago, the buying and selling of stocks was completed using a phone, pencil and pad of paper. Today’s markets are...

Not As Bad As You Think

While the fiscal circus in Washington is not a plus for economic growth, there are other factors which lead me to be a bit optimistic. The market seems to agree, so far this year the S&P 500 has gained 21% while the Dow is up 17%. If you have been listening to all the media hype and are sitting on the sidelines, shame on you. We all know that we will face the debt issue again in several months. But, under current conditions, the government shutdown will only reduce the GDP growth rate by...

Animal Spirits

One of the other economists honored with the Nobel Prize is Robert Shiller, who along with George Akerlof, wrote a book entitled “Animal Spirits.” The book documents multiple areas of economic activity where humans exhibited irrational behavior. Perhaps the most interesting chapter in the book is an examination of the dotcom boom of the 1990’s. In many ways this accounting runs contrary to the efficient market theory which postulates that stock prices are set by rational investors in command...

Nobel Recognition

This year’s Nobel Prize for economics is shared by three American professors who are recognized for their work showing how stock prices are determined. While their research efforts go back more than five decades, their findings have been generally ignored by Wall Street. At the core of their work is the “efficient market theory” developed by Gene Fama of the University of Chicago. Fama’s work demonstrates that stock prices adjust immediately to all public information. Prices on data such as e...

Wall Street Doesn't Care

Here it is, Monday morning and just a few days from the end of the United States as predicted by our politicians and the media. But, Wall Street is telling us it’s not going to happen. Sure, the market is down, but by less than 1% and if Wall Street thought that the worst was going to happen, we would be down 30% or 40%. So does that mean that this is a nonevent? NOT. If Congress and the President can reach an agreement in time to stave off default, their actions have already created a headwi...

Ignorance Is Bliss

The moral of this week’s Intelligent Investor column is that successful investors should ignore market forecasts. The column begins with fascinating statistics about how stock market analysts’ earnings estimates begin every quarter optimistically and then they gradually lower them as the announcement date draws near. The article contends the motivation behind as is to tap down expectations and then when results are better than expected, everybody is happy, giving the market a bounce. Think ab...

An Alternative Index

Not everybody is emotionally equipped to put all of their 401(k) assets in one index fund and simply leave it alone. If this describes you, an alternative solution is to put a portion of your 401(k) portfolio into a bond index fund. Bond index funds are similar to stock index funds except they track a segment of the bond market. Like there stock counterpart, bond index funds are not actively managed. An advantage of inactive management is low portfolio turnover and a lower cost of owning the...