A short conversation with Prof. Fama by Xing Zong(2)
F: Theories bolstered by detailed empirical evidence certainly do. Personal experience is typically worthless. It is empirical work based on tiny samples, and so typically uninformative.
Z: Do you think there is a breach between the financial theories and real markets? Why some legendary investment gurus, such as Warren Buffet, Leon Levy, David Swensen can constantly beat the market?
F: The press tends to focus on the winners. But there are also big losers. The unanswered question is whether winners and losers are both just chance results.
Z: Prof. Fama, I read on your website where you include corporate finance as one of your research topics. So I also have a question on that topic: do you believe in managing a company only on the basis of large shareholder value? What about small shareholders? Is taking care of shareholders’ interest the real goal for doing a business?
F: I wrote several papers with Michael Jensen in the early 1980s arguing that economic survival pushes firms towards maximizing the combined value of all inputs. But since stockholders are most at risk, maximizing stockholder value comes close to this goal.
Z: When you were teaching finance courses at University of Chicago Graduate School of Business, what kinds of messages you would like to convey to your students?
F: In general, an appreciation of the scientific process of developing theories and then subjecting them to empirical tests. (I still teach full time.)
Z: Let’s have a few China topics before ending our discussion. Nowadays, with the rapid economic growth in China, finance becomes one of the most popular areas. What suggestions would you like to give to an aspiring Chinese young person who would like to dive into the financial ocean?
F: I would say obtaining an MBA or a Ph.D. degree from a good school, preferably the University of Chicago!
Z: Have you ever been to China? Chinese stock market had a great performance last year. What do you see in Chinese stock market?
F: I have never been to China. I worry that China does not have clear enforceable property rights of the type I think are necessary to the long-term survival of a stock market. Without enforceable property rights, what is an outsider buying? This is an open question in many emerging stock markets.
Z: Your book “Foundation of Finance” has been translated into Chinese language and widely acclaimed in China. What special message you would like to say to our Chinese readers?
F: Interesting. The book is no longer available in English (except occasionally on e-bay, where it sells for high prices).
