Wednesday, December 12, 2007
Conflict of interest? (8:49 pm)
I’m not quite sure why Conde Nast Portfolio would publish Michael Lewis’ profile of Dimensional Fund Advisors — Wall Street’s biggest nightmare — and the transformation of ex-trader Blaine Lourd, but I’m sure glad they did. The fascinating analysis of DFA, and their rather intuitive efficient-market theory, eviscerates the very concept of money managers. At least if you buy into, you know, capitalism.
Ellis, who had spent 30 years advising Wall Street firms, went on with charts, graphs, and more evidence than he needed to convince Blaine of the truth of that statement. The problem wasn’t Blaine; the problem wasn’t even the firms he worked for. The problem was the entire edifice of modern Wall Street, in which some people—brokers, analysts, mutual fund managers, hedge fund managers—presented themselves as experts and were paid fantastic sums of money for their expertise. But essentially, Ellis argued, there was no such thing as financial expertise. “I read this book,” Blaine says, “and I thought, My whole life is a lie, and everyone around me is facilitating this lie.”
A must read, as they say in the trade.
The efficiency of the markets depend on analysis of the underlying stocks. Without good analysis, the markets would be chaotic.
That said, one can take advantage of the analysis for free, simply by buying index funds. Of course, if everyone did this, it would lead to much less analysis and less efficient markets. Which could prove bad for everyone. . .
But people both love simple and blaming. So statements like “there was no such thing as financial expertise” has a great deal of appeal for the masses, despite being rather silly.
posted by don on 12-17-07 at 1:53 PM