Investing Expertise

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

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.” Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

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 annual return data stated by Value Line for 1965 (partial year) through 2008 (nearly 44 years), we find that: Keep Reading