NEW HAVEN - The treacherous tentacles of Eyjafjallajökull, the Icelandic volcano, have touched even the City of Elms. Matthew Bishop, U.S. business editor for the UK periodical The Economist, was scheduled to keynote the April 22 meeting of the Greater New Haven Chamber of Commerce, the business group's 216th annual confab. However, the shutdown of North Atlantic airspace due to ash contamination of the atmosphere trapped the journalist on the wrong side of the Pond.
Grabbing a bat to pinch-hit was Justin Fox, editorial director of the Harvard Business Review Group and author of a monthly Time magazine column on business and economics. That Fox is a wisdom-of-the-marketplace skeptic can be gleaned from the title of his book, The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street.
Fox's talk had a strong local hook: He traced the roots of the belief that "Markets always get prices right - they are a better judge [of optimal pricing of goods and services] than anyone else" to New Haven - specifically to 1880s Yale professor William Graham Sumner and his student Irving Fisher, the anti-Keynesian author of the quantity theory of money (that monetary supply has a direct, positive relationship with price levels). Fisher's legacy includes the unfortunate observation shortly before the October 1929 crash that "stock prices have a reached a permanent high plateau." Or not.
Fox's address to the packed Omni-New Haven Hotel Grand Ballroom was grandiloquently titled "The Future of Capitalism" which, the speaker observed, "will be the same as the past of capitalism - it generally works, but sometimes will be wildly wrong."
Markets, Fox said, are "micro-efficient - they usually get the stock price of Coca-Cola and Pepsi right. But they're not so efficient on the macro level. We should always be a little skeptical of the wisdom of the Dow."
Asked whether he had more faith in the wisdom of Wall Street or Main Street, Fox said: "Sustainable economic growth is always led by Main Street. When Wall Street leads the way, that's when we get into trouble."
Fox is also a blogger on the Harvard Business Review's hbr.org, and last month held forth on "Why the Yale Model of Investing Doesn't Work for Everybody." Pioneered by Yale's longtime (and legendary) endowment chief David Swensen, the Yale "model" is based on a willingness "to put your money into things that endowments and pension funds used to shy away from as too risky or illiquid or weird: hedge funds, private equity funds, real estate, timber," Fox blogged.
For most of Swensen's quarter-century at the helm, this unorthodox approach yielded the Blue Mother annualized returns of 16.1 percent (compared to 12.3 percent for the S&P 500) - until the crash of 2008, which pummeled the endowment to the tune of 25 percent.
That's one really bad year, for sure. But the real Yale model, Fox observes, "involves more than just an investing approach. It requires finding a very smart, capable person not motivated chiefly by money (Swensen could have made vastly more on Wall Street than he has at Yale) who is willing to stick with the same job for decades. And it involves an institution that puts enough trust in that person to weather a bad year or two without lots of second guessing."
And that's why Fox predicts that Swenson, and Yale's nest egg, will be just fine.
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