Spotlight: Ken French
We are finding most commentary on markets and the economy, while understandably bleak, is not useful for long-term investors. To provide perspectives based instead around what we know about investment principles, we have decided to shine a spotlight on some noteworthy individuals in the investment space.
The first person we wanted to highlight is Professor Kenneth French, a key figure at Dimensional Fund Advisors and in the academic community. Ken French has a way of explaining investment principles in a straight-forward manner, useful for both new and experienced investors. We have collected the following material for your interest.
Kenneth R. French is the Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College. He is an expert on the behavior of security prices and investment strategies.
He and co-author Eugene F. Fama are well known for their research into the value effect and the three-factor model, including articles such as "The Cross-Section of Expected Stock Returns" and "Common Risk Factors in the Returns on Stocks and Bonds."
His recent research focuses on tests of asset pricing, the tradeoff between risk and return in domestic and international financial markets, and the relation between capital structure and firm value.
French has consulted with Dimensional since 1992 and is now the firm's head of investment policy and a member of its board of directors. He and Professor Gene Fama help develop and refine Dimensional's investment strategies. Fama and French also work with Dimensional's financial advisors and institutional clients to engineer efficient investment solutions.
The Difficulty of Timing the Market
In this short video, Ken French compares market timing to betting on sports.
He packs a great deal of insight into such a short speech, describing how it is not enough to predict the odds of each team winning, you must also know when the bookmaker has miscalculated their payouts.
This video is one of four released by Dimensional. Here are links to the other three in the series:
How to Think About Investment Risk - A new perspective on the main risks faced by investors, in terms of future consumption.
Building Confidence as an Investor - Ken French describes how his own portfolio was built around minimising regret.
What to Consider when Building a Portfolio - An exploration of how portfolios are built, starting with a global portfolio.
Fama/French Q&A Forum
Ken French and Eugene Fama have an online forum where they answer questions from investors. Although they do not frequently add new questions, this is because the answers they provide seldom change with time.
For an expert's view on a wide range of economic and investment topics, we recommend skimming through the forum. Here is a quick example of the questions they have answered:
Q: Many experts characterize the current environment as a "stock picker's market." Is there any evidence that stock selection is more successful under certain market conditions?
EFF/KRF: They can't be experts since, as Bill Sharpe pointed out in 1991, this is a fallacy of arithmetic. In aggregate, investors hold the market. This means that, before fees and expenses, the alpha for investors as a whole is always zero.
Our recent mutual fund paper says that, in aggregate, passive mutual funds nail their benchmarks: their aggregate alpha is zero. If this is true for passive investors more generally, it implies that the aggregate pre-cost alpha of active investors (stock pickers and other types) is also always zero–regardless of market conditions.
Active investors can only win at the expense of other active investors.
[Note: alpha is an excess return above the market, earned through successful active management]
A few questions we found interesting:
Rational Reminder Podcast
For those interested in podcasts, Rational Reminder, a project by Canadian advisers PWL Capital, had Ken French on for their 100th episode. They discuss a wide range of topics, all of which are timestamped on the web-page.
A New Normal?
The phrase "new normal" has been thrown around a lot recently. Following the GFC, it was made in reference to expectations of subdued returns to come. Ken French, in the 2011 interview below, dispels these ideas. He suggests that times of uncertainty offer greater expected returns for investors.
With ideas of a "new normal" reemerging, Ken's insights remain invaluable to long-term investors.