Investing Expertise

When the market trend challenges their beliefs, what do we hear from market “experts?” Keep Reading

What is the role of journalists in the stock selection process? Are they experts, signal amplifiers or noise amplifiers? Is their collective view short-term or long-term? In two recent papers, Alexander Kerl and Andreas Walter examine the nature and value of the stock filtering role of journalists writing for German personal finance magazines (such as Effecten-Spiegel and Börse Online). Keep Reading

While we normally do not stray far from the stock market, an article on the forecasting ability of commercial real estate gurus relates strongly to our ongoing investigation of investing expertise. Do these experts add value for investors in the relatively illiquid real estate market? In his 2005 paper entitled “A Random Walk Down Main Street: Can Experts Predict Returns on Commercial Real Estate?” David Ling examines the ability of institutional owners and managers to predict commercial real estate investment performance for various property types across major metropolitan markets. Using (1) predicted relative property returns (desirability rankings) for nine property types and 16 metropolitan markets from the Real Estate Research Corporation’s (RERC) quarterly Real Estate Investment Survey over a thirteen-year period and (2) corresponding National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index returns, he concludes that: Keep Reading

Do broker stock recommendations predict future returns? Are analysts at independent brokers more accurate than those associated with investment banking firms? Did the changes in research rules after the Internet bubble affect analyst behavior? In his November 2006 paper entitled “Do Affiliated Analysts Mean What They Say?”, Michael Cliff compares the performance of stock recommendations made by analysts employed by lead underwriters to that of recommendations made by analysts working at independent brokers. Using data for the period 1994-2005 (13,794 recommendations from lead underwriters and 10,216 from independent brokers), he finds that: Keep Reading

…you may be seeing something like this: Keep Reading

How do typical investors/traders process advice from others? Are they overconfidently dismissive, or underconfidently trading on the latest guru pronouncement? In their February 2006 paper entitled “Effects of Task Difficulty on Use of Advice”, Francesca Gino and Don Moore perform two controlled experiments to examine the tendencies of people to reject or accept advice depending on the complexity of the associated task. In one experiment, the 61 participants (mostly university students) must seek advice, and in the other they have the option of seeking advice. Since the advice came from other participants who were generally no better informed, the best strategy for each participant was to reduce noise by averaging own opinion and advisor’s opinion. Based on the results of these experiments, the authors conclude that: Keep Reading

Are newsletters good sources of stock picks? Specifically, do their recommendations persistently generate excess returns? In their October 1998 paper entitled “The Performance of Investment Newsletters”, Jeffrey Jaffe and James Mahoney tackle these questions. Using the investment newsletter archive of the Hulbert Financial Digest for 1980-1996, they determine that: Keep Reading

Is success as an entrepreneur all luck, or is there a provable contribution from skill? Do winners win just because they are willing to roll the dice, or because they consistently bring innovative insights to the market? In their July 2006 paper entitled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs”, Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein pit skill against luck by investigating the persistence of success among serial entrepreneurs. Focusing on the founders of companies listed by Venture Source as recipients of venture capital during the period 1975-2000, they conclude that: Keep Reading

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

Does a natural selection metaphor apply to stock picking models? In other words, can competition among a large set of dynamic models to mimic historical stock performance data evolve the most fit models? In their May 2006 paper entitled “Stock Selection – An Innovative Application of Genetic Programming Methodology”, Ying Becker, Peng Fei and Anna Lester address these questions by applying genetic programming to stock picking. Genetic programming enables the testing of a wide range of stock performance indicators in linear, non-linear and non-obvious combinations. The authors choose the S&P 500, excluding financials and utilities, as their universe of stocks and define two distinct types of stock-picking model fitness: (1) risk-adjusted outperformance compared to a traditional stock-picking model; and, (2) highest possible return independent of risk. They construct for comparison a traditional stock return forecasting model based on a linear combination of four composite factors: valuation, quality, analyst expectations and price. They use monthly data (65 variables for each of about 350 stocks) over the period January 1990 through December 2005 to create environments for model development and out-of-sample testing. They show that: Keep Reading