Investing Expertise
Can analysts, experts and gurus really give you an investing/trading edge? Should you track the advice of as many as possible? Are there ways to tell good ones from bad ones? Recent research indicates that the average “expert” has little to offer individual investors/traders. Finding exceptional advisers is no easier than identifying outperforming stocks. Indiscriminately seeking the output of as many experts as possible is a waste of time. Learning what makes a good expert accurate is worthwhile.
Timing Ability of Bond Mutual Fund Managers October 14, 2009
Do managers of bond mutual funds generate value for fund holders by successfully timing the market? In the September 2009 update of their paper entitled “Measuring the Timing Ability and Performance of Bond Mutual Funds”, Yong Chen, Wayne Ferson and Helen Peters evaluate the ability of U.S. bond fund managers to time nine common factors related to bond returns. The nine factors reflect the term structure of interest rates, credit and liquidity spreads, currency exchange rates, mortgage spread and equity market returns. The authors also define seven benchmarks matching different bond fund styles. Using monthly returns for more than 1,400 U.S. bond mutual funds and contemporaneous bond market factor and benchmark data during January 1962 through March 2007, they conclude that: More…
How About Grading Broker Upgrades and Downgrades? August 30, 2009
A reader asked: “Have you ever graded the upgrades and downgrades of the major investment brokers, or perhaps the minor ones? These calls are clear and public and have a long track record. It should be fairly easy to determine whether simply buying (selling) when Goldman upgrades (downgrades) beats the market.” More…
AAII Stock Screens August 25, 2009
A reader asked:
“The American Association of Individual Investors (AAII) has a lot of strategies they have been paper-trading over the the last 11 years at AAII StockScreens. Have you ever done an evaluation of those performance results? It seem like every strategy builds upon a well-known investing book or otherwise publicized strategy from the last 40 years.”
According to the AAII StockScreens “GettingStarted” introduction, the purpose of these screens “is to provide…access to a wide range of investment approaches. Some approaches follow the methods of well-know professionals, and allow you to implement their ‘style of investing,’ while other approaches implement time-tested techniques used to identify attractive stocks. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth. Some approaches are geared toward large-company stocks, while others uncover micro-sized firms. Most fall somewhere in the middle.” AAII provides descriptions, characteristics and performance statistics for the screens. What can investors/traders learn from this collection of investment approaches? Using monthly performance statistics for the 59 screening approaches and for various potential benchmarks during the 139 months spanning January 1998 through July 2009 (available from AAII via download), we find that: More…
Collective2, a Marketplace of Trading Systems July 31, 2009
According to the introduction at Collective2, the site “monitors over 8,920 trading systems. Whether you trade stocks, futures, forex, or options – you’ll find a trading strategy here… Think of us as an independent ‘trading system auditor.’ We’ll investigate which trading systems are profitable.” Additionally, Collective2 serves sellers (renters) of trading systems: “If you are an expert trader, or have developed a ‘black box’ system, you can earn income by making your trade signals available to C2′s over 32,000 registered users.” What can investors/traders learn about stock trading systems from the aggregate data compiled at Collective2? Using statistics available there for 193 active stock trading systems (as of 7/29/09) and some contemporaneous returns for the S&P 500 Index and the NASDAQ Composite Index, we find that: More…
A Few Notes on Full of Bull July 23, 2009
In the 2009 edition of his book, Full of Bull, author Stephen McClellan seeks to “expose the puzzling and deceptive behavior of Wall Street that so disadvantages individual investors, tripping them up in their attempts to invest properly and rationally. It unscrambles the confounding practices of the Street in terms a layperson can comprehend. …Once armed with an insider’s understanding of all the Street’s subtleties, you can be your own investment analyst.” Stephen McClellan was a securities analyst for 32 years. The principal messages of the book are: More…
The Most Intriguing Gurus? June 10, 2009
Which stock market experts intrigue investors and traders the most? For insight, we examine CXOadvisory.com log files for visits derived from web search engines based on search phrases associated with specific experts. We consider the top 50 search phrases for each of the last three years and consolidate similar searches (e.g., “jim jubak” and “jubak” or “ken fisher” and “fisher investments”). We also normalize results for each year by expressing relative interest in experts by dividing the number of searches for each by the total number of searches for all experts. Using the top 50 search phases arriving at CXOadvisory.com for each of 2007, 2008 and 2009 (to date), we find that: More…
Performance Trend for Value Line’s Timeliness Ranking Last Updated: June 4, 2009
A reader observed and suggested:
“When I first started paying attention to markets in the 1980s and 1990s, one frequently cited argument against market efficiency was the Value Line anomaly – the fact that stocks with their best timeliness ranking had extraordinary returns over a long period. You can still find charts showing how well Group 1 has done versus Group 5 over a multi-decade period, but it seems that there has not been much cumulative performance separation among groups in recent years. Some raw data on their site shows that the predictive power of the ranking system seems to be missing from about 2000 onward. It might be interesting to look at what was once a widely discussed method of potential market outperformance.”
The Value Line Timeliness Ranking System sorts stocks into five groups, with Group 1 (5) expected to exhibit the strongest (weakest) future performance. Value Line summarizes annual performance data for Groups 1 through 5 based on assumptions of both weekly and annual group re-sorting. Because the trading frictions of weekly re-sorting are likely high and difficult to estimate, we focus on performance by group for annual re-sorting. Specifically, we measure the Group 1 annual returns minus the Group 5 annual returns and the Group 2 annual returns minus the Group 4 annual returns. If the ranking system is persistently reliable, both sets of differences should be persistently positive, with the differences for the first set generally larger than those for the second set. Using the annual return data stated by Value Line for 1965 (partial year) through 2008 (nearly 44 years), we find that: More…
Guru Stock Market Forecasting Accuracy Over Time May 7, 2009
A reader inquired whether the average accuracy rate for U.S. stock market forecasts at Guru Grades has been stable over time. The average accuracy rate is a cumulative (inception-to-date) calculation. To test its stability, we calculate the inception-to-date, equally-weighted average guru accuracy rates as of October 1 for each of the past four years (with 2008 not yet fully graded). Over this time, the database has expanded, with some gurus lapsing to inactivity and others being added, so the mix of active forecasters changes over time. Using all currently collected and graded forecasts, we find that: More…
Best Ideas of Mutual Fund Managers April 29, 2009
How many stocks within an equity fund manager’s portfolio represent truly “passionate” (high-conviction) picks? Do passionate picks outperform the diversifying “fillers” in the portfolio, and the market in general? In the March 2009 version of their paper entitled “Best Ideas”, Randy Cohen, Christopher Polk, and Bernhard Silli attempt to identify which holdings in equity mutual fund portfolios represent the high-conviction “Best Ideas” of the fund managers and then measure the performance those stocks after the conviction becomes apparent. They identify high-conviction holdings via several measures that indicate unusually high commitment (tilt) of funds to specific stocks, with the “Best Idea” in a portfolio being the stock with the highest tilt. Using monthly stock returns and quarterly fund holdings data for U.S. equity mutual funds over the period 1991-2005, they conclude that: More…
Critically Delegating, or Fearfully Abrogating? March 31, 2009
Do individuals tend to think critically about financial advisor recommendations, or blindly follow them? In the March 2009 article entitled “Expert Financial Advice Neurobiologically ‘Offloads’ Financial Decision-Making under Risk”, Jan Engelmann, Monica Capra, Charles Noussair and Gregory Berns investigate the neurobiological basis of the influence of expert advice on financial decisions via functional Magnetic Resonance Imaging monitoring of individuals choosing between a certain payment and a lottery, with and without expert advice. Using test results for 24 individuals (mostly female and mostly undergraduate students), they conclude that: More…
