Investing Expertise

Many gurus express certitude in their forecasts for asset classes (markets) and specific assets and for their associated investment strategy recommendations. How can they be so sure? If they are not really sure, why would they say they are? In his July 2010 paper entitled “Policy Analysis with Incredible Certitude”, Charles Manski categorizes incredible analytical practices that underlie certitude. His context is public policy, but substitution of “investors” for “public” and “investment strategy” for “policy” seems apt. Based on past study of problems that limit credible prediction, he proposes that: Keep Reading

A reader commented and asked: “I searched your site for ‘insider’ and found very little investigation of a relationship between insider buys and stock price movement. Is this an area you could look at, classify and present to readers?” Keep Reading

Are some analysts better stock pickers than others? How can investors discriminate? In their May 2010 paper entitled “Projected Earnings Accuracy and the Profitability of Stock Recommendations”, Daniel Kreutzmann and Oliver Pucker employ a three-step process to determine whether investors can use analyst characteristics to identify superior stock recommendations in real time: (1) relate eight analyst characteristics to past analyst accuracy in forecasting firm earnings; (2) apply these relationships to project individual analyst future earnings forecast accuracy; and, (3) relate the returns of consensus stock recommendations over holding periods of one, three and six months for the fifths of analysts with the highest and lowest projected earnings forecast accuracies. Using monthly analyst characteristics, earnings forecasts and stock recommendations, along with actual firm earnings and returns for recommended stocks, spanning 1994 through 2007 (168 months), they find that: Keep Reading

A reader commented and asked: “The problem with SSRN is that most papers published there are working papers, placed there to receive comments. Before any of these papers appear in a journal, they undergo peer review, one of the most important processes in scientific research. Experienced researchers in the field thereby filter out all the mistakes, wrong methods, incorrect conclusions, etc. How do you know that the working papers are not dramatically adjusted before publication in a peer-reviewed journal?” Keep Reading

Why does the public resist the wisdom of scientific consensus on “questions only they [scientists] are equipped to answer?” In their February 2010 article entitled “Cultural Cognition of Scientific Consensus”, Dan Kahan, Hank Jenkins-Smith and Donald Braman examine the tendency of individuals to perceive risk with biases congenial to their visions of how society should be organized. The authors focus on the examples of climate change, disposal of nuclear waste and the effect of permitting concealed possession of handguns. They measure individual cultural predisposition along two dimensions: hierarchy versus egalitarianism, and individualism versus communitarianism. Using results of an online survey of 1,500 U.S. adults during July 2009, they conclude that: Keep Reading

Are the most admired companies the best investments? Or, is current state of admiration a contrarian indicator for future returns? In their January 2010 paper entitled “Stocks of Admired Companies and Spurned Ones”, Deniz Anginer and Meir Statman use Fortune magazine’s yearly survey-based lists of “America’s Most Admired Companies” to answer these questions by measuring the returns (April 1 through March 31) of two portfolios reformed annually: admired companies (upper half of survey scores), and unadmired companies (lower half of survey scores). Survey respondents are senior executives, directors and securities analysts, and the questions asked seemingly relate indirectly or directly to the investment value of the companies named. Using these lists for April 1983 (survey inception) through March 2007 and associated stock return data, they conclude that: Keep Reading

A reader asked: “Is there a correlation between guru success and age. I ask this because: (1) Nassim Taleb talks about the success of younger traders (prior to blowing up at some point); and, (2) pessimism increases with age, or so it seems, and older traders are therefore likely to miss uptrends.” Keep Reading

In his 2009 book Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader, author Curtis Faith uses stories and examples to “show how to develop your intuition and confidence in the decisions of your gut instinct so that you can use your whole mind while trading.” He preempts left-brained skeptics as follows: “If you are one of those traders who doesn’t believe that gut instinct or intuition has any place in trading, I invite you to keep an open mind. I, too, once felt as you did. After all, I was trained to take a very systematic and logical approach to trading… I believed that it was important to keep your emotions in check.” Some notable points from the book are: Keep Reading

In his 2009 book Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition), author Harry Domash “describes practical step-by-step strategies for finding, researching, and evaluating investment candidates…one for growth stocks, and the other for value investors. …The methods described make use of information readily available to anyone connected to the Internet, but in new ways…” The target audience of the book encompasses “investors willing to put in the time and effort it takes to find and research profitable stock investments.” The culminations of the book (Chapter 18) are separate value stock and growth stock “analysis scorecards.” Some notable points from the book are: Keep Reading

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: Keep Reading