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Financial News Sentiment Predicts Stock Returns?

Does exceptionally negative news coverage predict hard times for a company and its stock price? In their August 2006 paper entitled “More Than Words: Quantifying Language to Measure Firms’ Fundamentals”, Paul Tetlock, Maytal Saar-Tsechansky and Sofus Mackassy test whether they can predict a company’s future performance and stock returns by quantifying the sentiment in its financial news coverage. Their sentiment measure is a standardized level of negativity based on word counts and the Harvard psychosocial dictionary. Using Wall Street Journal (WSJ) and Dow Jones News Service (DJNS) stories about individual S&P 500 firms during 1980-2004 (350,000 significant articles), along with contemporaneous financial and stock price data, they find that: Keep Reading

Jim Cramer’s Mad, Mad, Mad, Mad Market?

Can traders exploit irrational reactions to Jim Cramer’s stock recommendations by viewers of CNBC’s Mad Money? In their March 2006 paper entitled “Is the Market Mad? Evidence from Mad Money, Joseph Engelberg, Caroline Sasseville and Jared Williams measure the market’s reaction to Mr. Cramer’s buy recommendations. Using a sample of 246 initial recommendations made by Jim Cramer on Mad Money episodes between July 28, 2005 and October 14, 2005, as recorded by YourMoneyWatch.com, they conclude that: Keep Reading

Classic Paper: Company Valuation Methods

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the March 2004 update of the paper entitled “Company Valuation Methods: The Most Common Errors in Valuations” (download count over 6,000) by Pablo Fernandez. In this paper, the author describes the four most widely used company valuation methods: (1) balance sheet-based; (2) income statement-based; (3) goodwill-based; and, (4) cash flow discounting-based. He also illustrates a break-up value calculation and summarizes the valuation errors he has most commonly encountered. He states that: Keep Reading

Better to Have a Fund Manager with an Ownership Stake?

As of 2005, the Securities and Exchange Commission requires most mutual funds “to disclose…each portfolio manager’s ownership of securities in the fund” using dollar ranges. Should investors favor funds in which the fund managers hold direct stakes? In other words, do funds with management ownership outperform? In their August 2006 paper entitled “Portfolio Manager Ownership and Fund Performance”, Ajay Khorana, Henri Servaes and Lei Wedge exploit the new data to test the relationship between fund manager ownership and fund performance. Using monthly return data for a sample of 1,406 mutual funds having ownership data available as of the end of December 2004, they find that: Keep Reading

Left or Right, and Up or Down

Should investors lean toward governments at one end of the country political spectrum to find outperforming equity markets? In their October 2003 paper entitled “The Presidential Puzzle: Political Cycles and the Stock Market”, Pedro Santa-Clara and Rossen Valkanov examine monthly U.S. stock market performance versus executive branch party across 18 Presidential elections (1927-1998, 864 months) encompassing 10 Democratic and 8 Republican Presidencies. In their July 2006 paper entitled “Political Orientation of Government and Stock Market Returns”, Jedrzej Bialkowski, Katrin Gottschalk and Tomasz Wisniewski investigate whether the political orientation of 173 different governments systematically affects the performance of 24 international (mostly European) stock markets. Findings are: Keep Reading

Mutual Fund Advertising: Does Harrison Ford Offer a Better Return?

Do the billions of dollars of annual mutual fund advertising work to attract investors? If so, are the appeals rational or emotional? Does the advertising connect investors with the right funds? In his July 2006 paper entitled “Advertising and Portfolio Choice”, Henrik Cronqvist examines how mutual fund industry advertising affects investor choices and returns. Focusing on the effects of 50,000 multimedia advertisements by 454 funds on 4.4 million workers during the year 2000 launch of a new pension system in Sweden, he finds that: Keep Reading

Ben Zacks: The Zacks Way

We evaluate here the market commentary of Ben Zacks over the period June 2002 through January 2005. Ben Zacks is a co-founder of Zacks Investment Research and Senior Strategist and Portfolio Manager at Zacks Wealth Management Group. Since January 2005, Zacks.com has discontinued making his regular commentary publicly available (and removed his past commentary). The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days after the publication date for each item. Grading takes into account more detailed market behavior when appropriate. Red plus (minus) signs to the right of specific forecasts indicate those graded right (wrong) based on subsequent market behavior, while red zeros denote any complex forecasts graded both right and wrong. We conclude that: Keep Reading

Can You Learn Anything from Stock Message Boards?

Are stock message boards worth reading? If so, what clues point to useful information? In their November 2005 paper entitled “eInformation: A Clinical Study of Investor Discussion and Sentiment”, Sanjiv Das, Francisco Marti­nez-Jerez and Peter Tufano examine relationships among on-line stock message board discussions and related news and stock prices. They further employ content analysis software to measure the intensity and dispersion (level of disagreement) of message board sentiment. They focus on 170,000 messages from four stock message boards (Yahoo!, The Motley Fool, Silicon Investor and Raging Bull) for four stocks chosen to represent extremes of stock information flow (Amazon, Delta Air Lines, General Magic and Geoworks) during July 1998 through January 1999. Integrating the message board content with contemporaneous news items, stock price movements and one interview of a frequent message board poster, they conclude that: Keep Reading

Are the Returns for IBD’s New America Index for Real?

A reader asked whether IBD’s New America Index, which IBD claims has trounced that of the S&P 500 index by over 160% since late 1998 is “for real.” There is little publicly available information on the New American Index. Using what we can find, we conclude that: Keep Reading

Holding Court with Stock Market Gurus

Suppose investors/traders were to apply the same standards to a stock market guru that federal courts apply to an expert witness. What, if anything, would they find admissible? Using as a guide the 2003 paper by Jennifer Mnookin and Samuel Gross entitled “Expert Information and Expert Evidence: A Preliminary Taxonomy”, we conclude that: Keep Reading

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