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Posted by Elle on March 4, 2008, 8:15 am
>From
http://www.fool.com/investing/general/2008/02/13/dont-invest-like-these-experts.aspx:
A research paper recently covered at CNNMoney.com surveyed
finance professors, finding that many took their own
teachings to heart. About two-thirds didn't try to beat the
market, investing instead in index funds, and steering clear
of picking individual stocks. Almost 15% had never purchased
a single stock!
But a minority of these professors, the active traders, did
pick stocks, and did try to beat the market. However, rather
than using the sophisticated models and theories about risk
and asset pricing that they taught their students, the study
reports that these professors looked at a firm's
fundamentals (such as P/E ratio) and the momentum in its
stock price -- how it performed recently, compared to
52-week highs and lows. In other words, they were chasing
performance!
The researchers fittingly wonder why finance professors
spend so much time researching sophisticated risk models if
those models are "glaringly unimportant" in the real world.
Finance professors who want to beat the market ignore their
own (well-researched) advice and just chase the hot stocks.
Abstract of paper, from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980364 :
This paper asks the simple question of what matters to
individuals when they buy and sell stocks. To answer this
question, we surveyed all finance professors at accredited,
four-year universities and colleges in the US to assess our
profession's collective opinion on the matter. Our sample of
642 useable responses indicates that over two-thirds of the
sample are passive investors, and not because they don't
have the time to invest. The responses for all investors
indicates that the traditional valuation techniques
(specifically, the dividend-based valuation models) and the
traditional asset-pricing models (namely the CAPM, APT, and
Fama and French and Carhart models) are all unimportant in
the decision of whether to buy or sell a specific stock.
Instead, finance professors, particularly finance professors
who trade stocks at least monthly and who admit they are
trying to "beat the market" with their investment dollars,
believe that firm characteristics (especially, a firm's PE
ratio and market capitalization), along with momentum
related information (a firm's returns over the past six
months and year and a firms' 52-week low and high) are most
important when considering a stock sale and purchase. We
also show that finance professors have less investing
experience than one might expect, especially in the areas of
margin trading, short selling, and derivatives.
----
Editorial comment: But I am sure the "sophisticated" models
are still financially important to these faculty. They
ensure a steady stream of "research" enabling promotion and
tenure and so more job income.
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Posted by on March 4, 2008, 9:11 am
> >From
>
> http://www.fool.com/investing/general/2008/02/13/dont-invest-like-the...
> A research paper recently covered at CNNMoney.com surveyed
> finance professors, finding that many took their own
> teachings to heart. About two-thirds didn't try to beat the
> market, investing instead in index funds, and steering clear
> of picking individual stocks. Almost 15% had never purchased
> a single stock!
>
> But a minority of these professors, the active traders, did
> pick stocks, and did try to beat the market. However, rather
> than using the sophisticated models and theories about risk
> and asset pricing that they taught their students, the study
> reports that these professors looked at a firm's
> fundamentals (such as P/E ratio) and the momentum in its
> stock price -- how it performed recently, compared to
> 52-week highs and lows. In other words, they were chasing
> performance!
Finance professors have written papers documenting the value and
momentum anomalies, some of which I have cited in this group, and they
appear to be exploiting those anomalies in their own investments. I
don't know why you sneer at them, other than that being your general
disposition.
--------------------------------------
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which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by Elle on March 4, 2008, 11:00 am
> Finance professors have written papers documenting the
> value and
> momentum anomalies, some of which I have cited in this
> group, and they
> appear to be exploiting those anomalies in their own
> investments.
Wouldn't you like to know why they overwhelmingly do not
themselves apply the "traditional valuation techniques
(specifically, the dividend-based valuation models) and the
traditional asset-pricing models (namely the CAPM, APT, and
Fama and French and Carhart models)"? Isn't this worthy of
further academic study? Or are you not serious about the
truths that academic research reveals?
I posted for the general reader here, not you. No one should
be duped into thinking that investing successfully is so
terribly complicated. People as extensively educated as
Warren Buffett, Ben Graham, and Robert Shiller, tend to
agree, from my reading.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
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guidelines include a request for brevity and another for trimming posts to
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Posted by David Moore on March 4, 2008, 1:00 pm
Do note that the 2/3 of finance professors who are passive investors
may well be using the results of e.g. the Fama-French three-factor
model: they just choose index funds for the small and value asset
classes to complement a total market or other large growth dominated
index fund. That's what I do, though I'm a statistics professor
rather than a finance professor. So academic research such as that
of Fama and French should not be sneered at.
David
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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Posted by Elle on March 4, 2008, 5:20 pm
> Do note that the 2/3 of finance professors who are passive
> investors
> may well be using the results of e.g. the Fama-French
> three-factor
> model: they just choose index funds for the small and
> value asset
> classes
It seems to me you just repeated what my original post
already stated. See the part that says two-thirds of finance
professors "took their own teachings to heart" and bought
index funds.
The focus (in the Motley Fool article and the paper) seems
to be on the one-third who blew off indexing and instead
chose to pick stocks, but not using any of the complicated
traditional models they teach.
Aside: From my reading, small cap index funds are not proven
the way larger cap ones are.
The question is still begged as to whether the one-third of
finance professors in this study who consider themselves
mavens of stock picking are beating the market. Or are they
vulnerable to the same temptations that many hum-drum day
traders are? It's worth seeking other papers that study
this.
I do agree we should trumpet the likes of certain finance
(or specialized econ) professors. E.g. Professor Jeremy
Siegel, now an advisor to WisdomTree investments, and owner
of 2% of the company. Also Professor Robert Shiller, whom I
mentioned earlier. Fortunately this newsgroup regularly
refers to the teachings of some of the greats, even if it is
only by implication when, say, index funds are recommended.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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