According to Fama, low-cost index funds are inherently better than managed funds, as markets are efficient. “It’s not only better, but it’s also cheaper,” the Nobel Laureate said, adding that a small investor should just go with the market.
Fama, who used computers for his studies back in 1962, when very few had even seen one, does not believe that artificial intelligence (AI)-led trading will eliminate human trading.
“I don’t think the patterns that AI can bring about are just there. Markets are efficient, they adjust …” said the professor, who teaches at the University of Chicago Booth School of Business.
Finance, as a business, will continue. “Markets are always changing, basically finance will keep going,” Fama said.
However, Fama did not want to hazard a guess on whether the stock markets or tech stocks are in a bubble. “You don’t see bubbles coming, you see them going. Bubbles are always in hindsight,” Fama said.
Unlike equities, it is easier to apply efficient markets hypothesis for fixed income as the cash flows are predictable, particularly in case of government bonds, Fama said. However, it is difficult in case of corporate bonds because of the lack of liquidity.
Fama also praised emerging markets for adopting modern trading mechanisms. These emerging markets witness heavy trading, and the volatility “is really high.”
According to Kotak, India has extremely efficient equity markets and ranks in the top four in terms of volume. India also has much greater liquidity in the markets than many established markets, Kotak said.
The economy is looking much better in October and November than in April or May, and there is much greater efficiency and productivity in the organised sector, Kotak said.
“Significant reduction in interest rate is making the core discount rate much lower, and assets are adjusting to lower discount rate,” Kotak said. Retail investors taking interest is a good sign for the economy, but they should be careful about leverage. “There should not be any hubris or exuberance, even as we get to know about bubbles only with the hindsight, as professor Fama mentioned,” said Kotak.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.