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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.

Expert Overconfidence?

In media interviews and in their own columns, expert investors often project high levels of confidence regarding their opinion of market direction and their stock recommendations. Are they overconfident with respect to their private information and/or abilities? In their paper “Overconfidence of Professionals and Lay Men: Individual Differences Within and Between Tasks?”, Markus Glaser, Thomas Langer and Martin Weber analyze whether professional traders and investment bankers are overconfident in their judgments to the same degree as non-professionals. Based on testing of 33 professional traders and 90 investment bankers, and of control groups of advanced students specializing in finance and banking, they conclude that: Keep Reading

The 5-Star Kiss of Death

In his paper “The Kiss Of Death: A 5-Star Morningstar Mutual Fund Rating?”, appearing in the second quarter 2005 issue of the Journal Of Investment Management, Matthew Morey examines the performance of mutual funds immediately after first achieving a Morningstar 5-star rating. Focusing on diversified domestic stock funds from July 1993 to July 2001 (273 funds), he concludes that: Keep Reading

Stock Market Forecasting

If your crystal ball has not been working so well… Keep Reading

Do Stocks Ever Hit Analyst Target Prices?

In their March 2005 paper entitled “Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?”, Mark Bradshaw and Lawrence Brown test the accuracy of 12-month stock price targets both for individual analysts and for analysts overall. Using a filtered sample of about 100,000 individual 12-month stock price targets from Thomson Financial over the period 1997-2002, the authors conclude that: Keep Reading

What It Takes to Drive the Big (Hedge Fund) Rigs

Hedge funds now haul about $1 trillion in capital from opportunity to opportunity around world markets. Hedge fund managers have latitude to operate in ways that mutual fund managers do not in terms of leverage, shorting and types of assets traded (such as derivatives). What makes the best hedge fund managers successful? In their March 2005 paper entitled “Hedge Fund Performance and Manager Characteristics Education and Age Matter…”, Haitao Li, Rui Zhao and Xiaoyan Zhang correlate the background characteristics of hedge fund managers with the performances of their funds. Using a dataset encompassing 1,000+ hedge funds over the period 1994 to 2003, they conclude that: Keep Reading

Trust Me, It’s a Great Stock

In his December 2004 paper, Michael Cliff examines the period 1994-2003 to answer the following question: “Do Independent Analysts Provide Superior Stock Recommendations?” For his investigation, “independent” means not involved in an investment banking relationship between one year before and two years after a recommendation. He finds that: Keep Reading

Investment Managers: Randomly Walking the Plank?

In the February 2005 issue of The Financial Review, Burton Malkiel offers “Reflections on the Efficient Market Hypothesis: 30 Years Later” as a pudding-based proof of his famous proposition. He pits the performance of professional investment managers against that of market indices and finds that: Keep Reading

Can the “Experts” Help You Beat the Market?

Should investors follow the recommendations of experts in picking stocks? Consider the findings in a April 2001 paper entitled “Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns” by Brad Barber, Reuven Lehavy, Maureen McNichols and Brett Trueman. Using the Zacks database for the period 1986 through 1996, they conclude that: Keep Reading

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