In 1966 while a graduate school professor at the University of Chicago, Eugene Fama developed the Efficient Market Hypothesis, which asserts that it is difficult if not impossible for investors to beat the market through active stock picking or market timing strategies. Fama was the first to use scientific methods, with the aid of statistics and computers, to explain the way in which security prices change. Fama’s efficient market research formed the basis for the first ever passively managed index fund, the S&P 500 index, and thus changed the investing world forever. It is for this work that Mr. Fama just won the Nobel Prize in economics and we could not be happier or more proud for him.
Using the same scientific methods, in 1993 Eugene Fama and Ken French developed the Fama-French Three Factor Model to identify the sources of risk that explain differences in stock returns. Specifically, Fama and French identified that a stock’s relative size and price-per-share determines it’s risk and return expectation. The smaller and less “valuable” the company – the riskier the investment and the higher it’s expected return.
In 2007, Tom Raffa and I (Dennis Gogarty) had the good fortune to meet and attend one of Mr. Fama’s lectures. Following this event, Raffa Wealth Management began to incorporate in our investment strategies the findings from both the Efficient Market Hypothesis and the Fama – French Three Factor Model. As of June, 2009 all RWM client portfolio’s fully reflect our strong belief in Fama’s research.
This doesn’t mean that your portfolio is simply invested in the S&P 500 index. It does mean, however, that none of your hard earned money is being spent on active managers that endeavor to time the market or make bets on individual companies, sectors, or countries. Rather, we deliver a very precise asset allocation strategy that balances investment in stocks and bonds based on your unique circumstances while emphasizing, to some degree, the small and value factors that we believe will provide you excess returns.
Click here to watch a short (3:12) video about Eugene Fama and the evolution of finance: Fama – Evolution of Finance
As always, thank you very much for your business.