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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.

Filtering the Luck Out of Mutual Fund Performance Data

What proportion of mutual funds truly, after accounting for luck, generate positive alpha? Is there a reliable way to find such funds? In the March 2008 version of their paper entitled “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas”, Laurent Barras, Olivier Scaillet and Russ Wermers apply a new technique to measure the role of luck across a large sample of mutual funds. Using monthly returns for 2,076 U.S. actively managed domestic equity mutual funds (1,304 growth, 388 aggressive growth and 384 growth and income) existing for at least 60 months during 1975-2006, they conclude that: Keep Reading

The Wall Street Journal’s SmartMoney Fund Screen

Does the Wall Street Journal’s SmartMoney Fund Screen help its readers beat the market? In the February 2008 version of their paper entitled “Do Mutual Fund Media Recommendations Hold Value? An Empirical Analysis of the Wall Street Journal’s SmartMoney Fund Screen”, George Comer, Norris Larrymore and Javier Rodriguez employ two methods to test the performance of mutual funds listed at the ends of the Wall Street Journal’s SmartMoney Fund Screen columns during the year before and the year after publication. These weekly columns flag top performing mutual funds based on criteria such as fund objective, historical returns and expense ratios. The authors collect and assign the funds in these lists to one of five fund categories: domestic equity, international equity, sector, hybrid (asset allocation and balanced funds) and fixed income. Using daily returns for 399 mutual funds (263 unique) listed during 2005, they conclude that: Keep Reading

Comprehensive Overview of Research on Equity Analyst Forecasting

What is the state of research on the forecasting methods and outputs of equity analysts? In their 2008 paper entitled “The Financial Analyst Forecasting Literature: A Taxonomy with Suggestions for Further Research”, Sundaresh Ramnath, Steve Rock and Philip Shane catalog and organize past research on the forecasting of equity analysts with focus on the period since 1992. Using results from approximately 250 post-1992 papers related to equity analysts from eleven major research journals, they summarize findings related to the following questions: Keep Reading

Reliable Outperformance Among Bond Fund Managers?

Does past performance predict future results for bond funds? In their April 2007 paper entitled “‘Hot Hands’ in Bond Funds”, Joop Huij and Jeroen Derwall measure persistence in the relative performance of bond mutual funds. Using return data for 3,549 bond funds spanning 1990-2003, they find that: Keep Reading

Analyst Ratings: Levels or Changes?

In considering the stock ratings of expert analysts, should investors focus more on the level of the ratings or changes in ratings? In their December 2007 paper entitled “Ratings Changes, Ratings Levels, and the Predictive Value of Analysts’ Recommendations”, Brad Barber, Reuven Lehavy and Brett Trueman investigate the potential value to investors of both levels of (strong buy, buy, hold, sell, strong sell) and changes in analyst stock ratings. Using real-time analyst stock ratings from two databases spanning 1986-2006 (more than 1,000,000 ratings) and contemporaneous daily stock returns, they conclude that: Keep Reading

Mutual Fund Investors Underperform Their Underperforming Funds?

Mutual fund investors have two ways to beat the market: (1) pick the right funds, and (2) time their purchases and sales. How effectively does the average fund investor execute the latter goal? In their December 2007 paper entitled “Investor Timing and Fund Distribution Channels”, Mercer Bullard, Geoff Friesen and Travis Sapp examine the investment timing performance of equity mutual fund investors and the relationship of this performance to the fund distribution channel. Using data on returns and funds flows for 6,164 U.S. equity mutual funds during 1991-2004, they conclude that: Keep Reading

Invest Like the Ivy League?

Just why do those Ivy League endowments do so well? In their October 2007 paper entitled “Secrets of the Academy: The Drivers of University Endowment Success”, Josh Lerner, Antoinette Schoar and Jialan Wang investigate the performance of university endowments overall during the past decade and the factors contributing to outperformance of the most successful ones. Using voluntarily provided holdings and return data for over 1,300 university endowments mostly over the period 1992-2005, they conclude that: Keep Reading

The Stock Picking Expertise of the Business Media

Do the business media serve as reliable sources of good stock picks? In his 2003 working paper entitled “Fifty-Fifty. Stock Recommendations and Stock Prices. Effects and Benefits of Investment Advice in the Business Media”, Thomas Schuster surveys and summarizes past research on this question. Using the results of 32 studies of relationships between business media stock recommendations and stock prices, he concludes that: Keep Reading

Slim Pickings Among Stock Picks of Columnists?

Are the stocks recommended by columnists in major business magazines good short-term and/or long-term picks? Can one trade these stocks around the publication event? In their 2006 working paper entitled “The Value of Columnists’ Stock Recommendations”, Dan Palmon, Ephraim Sudit and Ari Yezegel assess the short-term and long-term performance of buy recommendations made by columnists in Business Week (BW), Forbes and Fortune. Sensitive to the fact that magazine availability dates differ from nominal publication dates, they use a range of benchmarks and risk adjustments to measure the abnormal returns of these picks. Using 2,503 buy recommendations from the three magazines made during 2000-2003 along with associated price, fundamentals and benchmarking data, they conclude that: Keep Reading

Concentrating the Superior Knowledge of Short Sellers

Why does high short interest indicate future underperformance of stocks? Does the reason suggest a way to refine the short interest signal? In their October 2007 paper entitled “Why Do Short Interest Levels Predict Stock Returns?”, Ekkehart Boehmer, Bilal Erturk and Sorin Sorescu employ two distinct methods to determine which of two hypotheses drives the underperformance of heavily shorted stocks: (1) constraints on short selling, or (2) superior private information of short sellers. These methods combine the level of short interest with the level of institutional holdings (supply of shares available for lending) and with earnings surprises. Using return, short interest, institutional ownership, earnings and related fundamental data for a broad sample of stocks over the period 1988-2005, they find that: Keep Reading

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