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Nobel Prize Winning Investment
Theories from University of Chicago
The Anchor of our Investment Philosophy
'Efficient Capital Markets'
hypothesis and its influence on our investment philosophy
The Efficient Market Hypothesis (EMH), crafted by Nobel laureate Eugene Fama of the University of Chicago, contends that financial markets rapidly assimilate all available information, rendering consistent market outperformance implausible. Fama's theory asserts that stock prices promptly adjust to new information, eliminating opportunities for profitable arbitrage.
As professional financial advisors, this theory shapes our philosophy. It underscores the need for a diversified, long-term investment strategy centered on asset allocation and risk management. We prioritize client education, tailoring portfolios to individual risk tolerance and long-term goals rather than chasing short-term gains. EMH advocates for a disciplined investment approach, steering clear of market-speculating attempts and focusing on the enduring aspects of wealth building and protection over the long-term horizon.
Fama French five-factor model.
The Fama-French five-factor model is an extension of the Capital Asset Pricing Model (CAPM) developed by Eugene Fama and Kenneth French. It incorporates additional factors to better explain stock returns beyond the market risk factor. This model introduces five factors: Market Risk (like CAPM) Size (Small Minus Big) - Stocks of small companies tend to outperform those of larger companies. Value (High Minus Low) - Stocks with lower valuations compared to fundamental measures often outperform higher-valued stocks. Profitability (Robust Minus Weak) - Companies with higher profitability tend to have higher returns. Investment (Conservative Minus Aggressive) - Companies with lower investment tend to have higher returns.
This model suggests that stock returns are influenced not just by market movements but also by a company's size, value, profitability, and investment strategies. It helps in understanding and predicting stock returns by considering multiple factors beyond traditional market risk.
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