Investing Research Articles

In their October 2005 paper entitled “The January Effect”, Mark Haug and Mark Hirschey examine the persistence of the January effect (abnormally high rates of return during the month of January). Using broad samples of value-weighted and equally-weighted returns spanning 1802-2004 for large-capitalization stocks and 1927-2004 for small-capitalization stocks, they conclude that:

…the Dow Theory has generated excess risk-adjusted (but not raw) returns when compared to buy-and-hold over some significant periods by following large trends.

…skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond those available from well-known strategies based upon firm size, value or momentum.

…human psychology and sociology can trump the forces of stock market rationalization, at least for a while.

…demographic trends suggest a headwind for U.S. equities over the next 15 years. Baby Boomers may drive P/Es down as they sell to fund retirement.

…10% annual return is currently a reasonable hedge fund benchmark.

…the greatest returns are to be found on average among stocks least widely held by institutions.

…calendar effects used to be but mostly aren’t any more.

…Professor Sornette’s attempt to model one equity market via diligent analysis of similarities to another equity market during a different time does not work, perhaps because the model is simplistically behavioral or because randomness dominates predictability.

…because mean reversion of price-to-book ratios outpaces reinvestment of earnings, value stocks outperform growth stocks.