Speaking at the Morningstar conference in Chicago today, Asness and his quantitative mind ripped right into the debate over efficient markets. At the center of Asness’ object of interest is the recent awarding of a Nobel Prize to economists Eugene Fama and Robert Shiller. What’s odd is Fama generally believes markets are efficient while Shiller professes they are inefficient, a debate at the center of economic theory.

Cliff Asness

Why would the Nobel Prize Committee split the award between people at opposite ends of a critical economic debate?  Could it be that they were really saying truth is found in the middle?

Asness describes robust academic debate as throwing gas on a fire

This is the position Asness was taking in his presentation, staking out the middle ground as apparently the Nobel Prize committee did. “I normally like to throw gas on a fire,” he said when describing his inclusion in robust academic debate, “but in this discussion I prefer using water.”

At the core of Asness’ economic thesis is that markets can be efficient at times and inefficient during other times. In other words, like the Nobel Prize Committee, his point is that truth in this debate is found in the middle – and it can be fluid. Markets move from overvalued to undervalued all the time.  The tech “bubble” near the turn of the century is one example of an overvaluation that scared Asness to the point he “has flashbacks just like those who fought in Vietnam,” he joked. “Markets were flat out wrong during the tech bubble.”

Efficient market guys don’t recognize bubbles

“Efficient market guys don’t recognize bubbles, but they exist,” he said, although he thinks the word “bubble” is overused.  The tech bubble, he says, was an example of value stocks losing to the expensive tech high flyers.

“Bubbles are defined as unsustainable,” he said, as he said this term only applies is specific instances and should not be overused.

It was amusing watching Asness, considered a dean in the quantitative trading school, communicate to the equity-based Morningstar audience. Most quantitative strategies based trade decisions on aspects related to the price of a commodity, trade volume and other methods not typically used by equity-based value managers. Although those familiar with quantitative investment measures not only laughed during the presentation, but found interesting perspective.