Stocks or Businesses?

I am not expecting a warm reception for the book from the academic finance community. The reasons should be obvious: the book calls into question the mechanical “system” that academic finance has become over the past 50 years. My objection is not technical–with the exception of several M&M propositions–but subjective, even philosophical.

The difference can be seen in an email I received from a senior professor whose work I greatly admire and to whom I had sent the book. He responded that “I buy stocks, not businesses.” With that simple statement, we part company.  The stock owner can go down the path of MVO (mean variance optimization) or any of the specific approaches that have emerged from MPT. In his case, it was the efficient market, as he stated that he “happily” owns an all market index fund with 3500 individual holdings.  (That is about the number of US stocks with a daily price and meeting basic listing/reporting/liquidity requirements.)  That puts him squarely in the efficient market camp where what is actually owned makes little difference.

Business ownership goes in a completely different direction. One approach is not wrong and the other right. They are just profoundly different.  One embraces the notion of a system that can be “solved” using mathematical equations. The other makes no such assumption.

The difference goes beyond just investment and extends to economics as a whole, a topic I will be taking up in my next post.