A simple summary of today’s “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013”, or the Economic Nobel Prize as everyone incorrectly calls it:
Eugene Fama: You cannot really predict the price of a stock in the short run.
Robert Shiller: The ratio of stock prices to dividends (P/E) trends to be the same over time, so stock prices are also relatively predictable over time.
Lars Peter Hansen: You demand higher returns to compensate for riskier assets, especially in riskier times.
All of this points to investing based on how good an asset is, rather than the high speed trading or statistical arbitrage that drives most of the trades today. It’s a shot across the bows of the financial shenanigans that drove the insane valuations which created the global financial crisis. It’s a message of sanity.
Fama did a series of papers with Ken French from 1988 on asset pricing. Ken,who taught me finance at Yale and is a simply outstanding lecturer, really misses out here as no less than 11 of his papers are cited in the Nobel Prize Scientific Background.