"Capitalism is an awful system - it's just better than everything else."

Eugene Fama, professor at the University of Chicago school of finance, is considered "the father of modern finance."  The Fama-French Three-factor Model is the cornerstone of our investment strategy and philosophy at Willow Ridge.  

In this CNBC interview Gene discusses capitalism, efficient markets and whether government intervention can work...it's worth eight minutes of your time to hear his straightforward and common-sense perspectives on these important topics.  As few people can do, Gene answers these questions with clarity and in his down-to-earth way.

If you don't have eight minutes here are a couple highlights of his main points:

  • Goverment interference and regulation is not a good way to go because government incentives are political, and [the policy of] "too big to fail" doesn't have the discipline that can foster growth of the economy and the well being of the population as a whole.

  • "Government policy of bailing out banks that are 'too big to fail' is perverting activities and incentives in financial markets all over the place.  You're giving the big financial firms the license to increase risk where the taxpayers will bear the downside and the firms bear the upside.  This is not capitalism.  Capitalism says "if you do poorly you will fail" so we have to take the concept of 'too big to fail' off the table.  Let the shareholders ride the ups and downs without passing it along to the taxpayers."

  • "People look at market swings and think 'it should be very easy to beat prices and do better than a buy and hold strategy.'  The evidence shows even the professionals can't do it."

A simple way to protect the economy from wild west investment banking is to separate the two activities by reinstating the Glass Steagall Act as I've written previously in "Why banks need to become like utility companies" and in "Obama wakes up to healthy banking reform." 

For more information on the pitfalls of active investing, Steve wrote an easy-to-read article called "The Inconvenient Truth About Active Investing" which I highly recommend.