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Nobel Prize in Economics Seen as Contradictory, Counterintuitive

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A year from now, when the 2014 Nobel Prize in economics is being awarded, the S&P 500 will either be higher, lower or right where it is today. If you find that sort of statement to be useless, it's sort of how some in the investment world are viewing this morning's three-way award for "Trend-spotting in Asset Markets."

"It's interesting they picked those three together," says Andrew Wellington, chief investment officer at Lyrical Partners in the attached video, "because some of their theories contradict each other."

While he says the research of Eugene Fama, Lars Peter Hansen and Robert Shiller all address a broad issue of how assets get priced in the market, the notion that things are predictably unpredictable isn't going change how he runs money.

For example, Wellington says that Fama's famous Efficient Market Hypothesis argues that it is impossible to beat the market by picking individual stocks, whereas the lesson from Shiller's work is that market trends can indeed be forecast over a three to five year period.

"It seems sort of counter-intuitive that the further out you go the easier it is to predict things," Wellington says, but concedes that the "volatility and variability" of short-term trading that's driven by emotion ultimately ebbs and markets revert back to their long-term averages. "Anytime you put a bunch of humans together you're going to get a bunch of mistakes, you're going to get emotion over-riding reasonable analysis."

For its part, the Nobel committee characterizes the impact of its choice this way:

"The work of the Laureates has affected not only academic research but also market practice. The fact that stock markets are very hard to predict in the short run, and that stock-picking is very difficult both in the short and the long run, has led to close examination of the performance by mutual funds...and the recent growth of index funds."

While that might seem like heresy to a stock-picking fund manager like Wellington, it's not thanks to the enviable performance of his lean and lightly turned Lyrical U.S. Value Equity Fund which holds just 34 stocks and changes names only about six times year.

"The growth of indexing has been a great benefit to what we do," he says. "S&P puts Exxon (XOM) and Apple (AAPL) in their index, not because they're good investments, but just because they're there, and just being there is not exactly the highest investment standard."

Wellington and Lyrical Partners have been able to capitalize on the short and long-term mistakes of other investors as well as all sorts of other market inefficiencies, and their results put them in a very small camp of asset managers that can claim to have beaten their benchmark. It's a claim that the overwhelming majority of active managers cannot make, and one reason why it doesn't take a Nobel laureate to figure out that markets are irrational, volatile and almost impossible for the average person to beat.

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