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:
- Regarding business media stock recommendations over the short term:
- Statistically significant excess returns around the time of publication are common. Frequently, these abnormal gains begin to accumulate long before publication, generally peaking on the day recommendations become public.
- The typical investor cannot systematically exploit this effect because gains are in most cases already reflected in post-publication opening prices. The opportunity is available only to those who put the recommendations into action before publication.
- A price reversal usually follows as public attention decreases, with recommended stocks giving back some or all of the excess returns.
- The rare sell recommendations are more likely than buy recommendations to indicate permanent price changes.
- Regarding business media stock recommendations over the medium and long terms (see the table below):
- Publications generally cannot establish and maintain extended winning streaks. The longer the study period (the more reliable the inferences), the more it becomes clear that the distribution of returns is due to randomness rather than stock picking ability.
- Recommendations generally underperform over the medium term, even on paper. After transaction costs, they typically generate a loss. Investors who fall for the publicity systematically lose money.
The following table, taken from the paper, summarizes from ten studies the cumulative excess returns for business media buy recommendations six months, one year, two years and three years after publication date. Results support a conclusion that business media stock recommendations very likely underperform a passive investment strategy over the medium and long terms.
In summary, “neither journalists nor their informants can systematically and accurately predict stock prices.”
