Eugene Fama of the University of Chicago was recently awarded the Nobel Prize in Economics. It is difficult to overstate Professor Fama’s influence on finance and personal investing. It is his early work which provided the intellectual foundation for index funds.
You may recognize Professor Fama’s name from his association with Dimensional Fund Advisors (DFA). Fama has been on DFA’s board since the firm’s inception.
In the 1960’s, Fama showed that stock prices are extremely difficult to predict in the short run, and new information is very quickly incorporated into prices. Fama coined the term “efficient market” to describe how competition amongst investors quickly drives prices to reflect all relevant information. In such a world, no investor can consistently beat the market without taking greater risk.
This simple, yet powerful idea is the basis for Dimensional Fund Advisors, launched in 1981 by two of Fama’s former MBA students. Fama’s research underpins DFA’s bond strategies, and his research with Dartmouth’s Kenneth French is the foundation of DFA’s approach to stock funds. DFA funds emphasize stocks which have had reliably higher long-term returns, specifically those of small, low-priced “value” and highly-profitable companies.
Our investment philosophy and strategy has been influenced heavily by Professor Fama’s evolving research. In fact, when communicating the specifics of our philosophy to folks over the years, we’ve no doubt suggested “Fama will likely one day win the Nobel Prize for this.”
It is wonderful to see Prof. Fama’s work recognized and validated in such a prestigious fashion.
Learn more about his career and contribution to finance in these two short videos.