In 2013 a curious thing happened in Stockholm. 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.
In short, Fama believes that stock prices are always rational and that there is no such thing as a market bubble. Shiller, on the other hand, believes that stock prices are often irrational and that bubbles definitely 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. And in the case of stock prices, the data are clear: Shiller’s point of view clearly 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, and so, 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 practitioner, the people most deserving of awards are those who have done the most to educate and to 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 – Ben Graham is well known as Warren Buffett’s teacher and mentor, but he 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. It is as true today as it was when the book was published in 1949.
Warren Buffett – Buffett is revered for his investment skills, but he 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 forty 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 – Since Vanguard founder Jack Bogle started one of the first index funds in 1976, and even today at age 89, he has done more than 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 – Terry Odean, a professor at the University of California, is not a household name, but he ought to be. Over a period of several years around 2000, he conducted a series of studies that examined the behavior of individual investors. While many people say that it is difficult to beat the market, Odean actually 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.
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 into 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, especially this one.
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 tenth 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, that doesn’t mean that it can’t happen. Yes, the past is a guide to the future, but it is not a perfect roadmap.
