Gene Fama, Jr. on the Power and Resiliency of Capital Markets

April 16, 2009 - 9:05 AM

“One of the best leading indicators is when even the most diligent and careful investors are ready to leave equity markets.  Then the cost of capital is the highest and prices are the lowest.”

 

“The cost of capital has been rising…as prices fall the expected return of stocks is rising and right now capital market investing may be less risky.”

 

“Political risk is priced risk…countries will choose in their self interest to keep capitalism and markets alive.”

 

These three comments are just a sample of the many interesting ideas shared by Gene Fama, Jr. in an April 6, 2009 conference call with Foster Group’s financial planning and investment team.  Gene’s thoughts and comments during this call (and at the April 22nd Wise Wealth lecture – see below) combine his insights on the global economy, investment markets, capitalism, and the current political environment.

 

In a period of such great global upheaval and uncertainty it is easy for investors of all types, from professionals to novices to get caught up in the short term noise of media punditry and political posturing.  There has likely never been a more “noisy” time to be an investor than the period that began with the collapse of Bear Stearns in March of 2008 and continues today. 

 

In these times we all need to be reminded about the foundational ideas which continue to support successful economies and capital markets.  Because these ideas are not the ‘Headline News” of the day, they are easily crowded out and forgotten in the frenzied discussion.  This is why voices like Gene Fama, Jr are so helpful. 

 

Regarding the strength and resiliency of capital markets, he reminds us that this system has produced enormous wealth and improved the standard of living for billions of people over the centuries. No other economic system has come close.  China, one of the most “successful” communist regimes in history has realized that even it must allow for capital markets to function relatively freely within its economic borders because the benefits both to the government and to its citizens are too great to ignore.  On the subject of China and capital markets, Fama commented that “they (markets) do not need a careful or gentle gardener…they are pervasive and resilient…they are adaptive…It is only the constant assault of the politicos and media that make belief in capital markets so tough.”

 

Foster Group is very pleased to be able to host Gene Fama, Jr. for our first Wise Wealth lecture series event on April 22, 2009 at the Des Moines Golf and Country Club.  Eugene F. Fama Jr. is a Vice President for Dimensional Fund Advisors and adapts academic research to the real world of investing. His presentations make complex ideas not only understandable, but useful and fun. Gene has spent more than fifteen years cultivating, refining, and discussing Dimensional's efficient markets investment philosophy.  His writing and speaking helps clarify detailed ideas like asset pricing and diversification, and explains why these principles are so important for investment plans. He holds a B.A. in economics from the University of Chicago.

 

The event starts at 6:30pm with appetizers and refreshments.  Gene will begin his comments at 7:00pm.  You can register for the event on the Foster Group website or by calling 515-226-9000 or (800) 798-1012.

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Foster Group is a fee-only financial planning and investment advisory firm, dedicated to providing objective, unbiased advice to clients. Founded in 1989, Foster Group has always been committed to having each client experience true personal wealth through sound, disciplined financial strategies integrated with individual, family, and organizational goals.

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