Eugene Fama, the father of the efficient market hypothesis, and Kenneth French, an economics expert, began research together in the 1990s – and created an amazing investing concept which is now known as Fama-French. This investment concept has now shaken the investment world at its core when they offered their explanation of the relationships between the size of stocks and the net asset value of a company with its future performance.
One of their most prominent findings was the Capital Asset Pricing Model, stating beta (the degree of correlation and leverage a stock has to the market) explains future stock returns, but at the same time only explains 70% movement in the share’s price. To close the gap, Fama and French added two factors as part of their Three Factor Model, effectively predicting 90% of the movement in a company’s share price, with the remaining 10% of share price movement referred to as alpha.
It is basically a nearly fool-proof way to completely beat the market – and from what we understand the wealthiest of the wealthy use it to invest. What Fama-French investing hasn’t done amazingly well yet is PR & marketing we have discovered.
The largest company which uses the FAMA model with great efficiency is Dimensional Fund Advisors (DFA) – and one of the directors of DFA is Eugene Fama. Their fund closely follows the indices since they believe them the most effective ways to beat the market, but they are not an index fund for the simple reason that index funds have to buy certain offerings at particular times.
DFA usually still buys shares in those same companies, but at times and using means to get the best deal possible.
Yet, DFA cannot be bought by consumers- they only sell through qualified independent investment advisors. DFA was founded in Brooklyn in 1981 by David G. Booth and Rex Sinquefield. When they started, the only businesses in Brooklyn were craftspeople and artisans, so their initial 10-phone line request to the phone company was met with suspicion.
Now their headquarters are in Santa Monica, where they regularly hold two-day training sessions for financial advisors who wish to sell DFA funds to their clients. Financial advisors who wish to sell DFA funds pay their own way for the training – and they are also one of the cheapest in terms of management costs.
DFA has cult followers for its amazing, uncanny scientific method to beat the market – yet so few people know about it, even though one of their investors is Arnold Schwarzenegger. They maintain exclusivity by only selling now directly to the funds or through one of their trained financial advisors.
Of course for those who do wish to invest, there are advisors that are highly recommended, including two from our research who we have found to be the best, CJM Fiscal in New York and MZ Capital in Washington, DC.
T. Rowe Price and Vanguard Funds use Google PPC ads to try and take web-traffic from DFA —- the Fama-French model of investing is clearly one which could benefit from major marketing and PR – and investors are the ones who would benefit.