Investing Expertise

Have regulatory changes, such as the reduction in lag time for reporting insider trades specified by the 2002 Sarbanes-Oxley Act (SOX) from up to 40 calendar days to two business days, improved the informativeness of insider trading data? In his December 2010 paper entitled “Has the Informativeness of Insider Filing Changed Post Sox? Has the Latest Credit Crunch Improved this Informativeness?”, Ashrafee Hossain compares the information content of SEC Form 4 filings before and after SOX,  Regulation FD (October 2000) and the recent credit crisis. He also investigates variation of informativeness with firm size, insider trade size and rank of the trading executive. He focuses on cumulative abnormal (relative to market) return for a two-day trading interval starting with the filing date. Using pre-SOX Form 4 trading and stock price data from January 1, 1996 through August 29, 2002 (1,191 filings) and post-SOX data from the start of mandatory electronic filing on June 30, 2003 through May 31, 2009 (41,603 filings), he finds that: Keep Reading

Are there commodity futures traders who consistently outperform? Who are they? What information do they exploit? In the September 2010 version of their paper entitled “Identifying Informed Traders in Futures Markets”, Raymond Fishe and Aaron Smith examine the short-term trading abilities of commodity futures traders by recreating their trading histories. They distinguish between those who trade intraday and those who hold overnight, arguing that the latter are efficient processors of technical trading information, while the former possess the best signals about fundamental short-run price pressures. Using daily positions for 8,921 traders in 12 futures markets over the period January 2000 through May 2009, they find that: Keep Reading

Do documented streaks of market outperformance occur more often than would be expected by chance, thereby supporting belief in investing skill? In their August 2010 paper entitled “Differentiating Skill and Luck in Financial Markets With Streaks”, Andrew Mauboussin and Samuel Arbesman compare actual streaks of mutual fund outperformance relative to the S&P 500 Index to results of 10,000 “no-skill” simulation trials to measure whether skill exists. The simulation assumes that both the number of fund-years per year and the probability that a fund would beat the S&P 500 Index during a year are the same as observed across a large sample of active mutual funds. Using monthly returns for 5,593 actively managed, large-capitalization U.S. mutual funds spanning 1962-2008 (50,693 fund-years), they find that: Keep Reading

Are a CFA designation, an MBA degree and experience critical success factors for fund managers? In their July 2010 paper entitled “Are You Smarter than a CFA’er? Manager Qualifications and Portfolio Performance”, Oguzhan Dincer, Russell Gregory-Allen and Hany Shawky examine the impact of having an MBA, a CFA and/or investment experience on investment manager performance. They control for market conditions and investing style and seek robustness of results by using five portfolio performance and two risk measures. Using fund performance data and manager characteristics for a sample of 890 managed equity and fixed income portfolios free of survivorship bias over the relatively calm period of 2005-2007, they find that: Keep Reading

Many gurus express certitude in their forecasts for asset classes (markets) and specific assets and for their associated investment strategy recommendations. How can they be so sure? If they are not really sure, why would they say they are? In his July 2010 paper entitled “Policy Analysis with Incredible Certitude”, Charles Manski categorizes incredible analytical practices that underlie certitude. His context is public policy, but substitution of “investors” for “public” and “investment strategy” for “policy” seems apt. Based on past study of problems that limit credible prediction, he proposes that: Keep Reading

A reader commented and asked: “I searched your site for ‘insider’ and found very little investigation of a relationship between insider buys and stock price movement. Is this an area you could look at, classify and present to readers?” Keep Reading

Are some analysts better stock pickers than others? How can investors discriminate? In their May 2010 paper entitled “Projected Earnings Accuracy and the Profitability of Stock Recommendations”, Daniel Kreutzmann and Oliver Pucker employ a three-step process to determine whether investors can use analyst characteristics to identify superior stock recommendations in real time: (1) relate eight analyst characteristics to past analyst accuracy in forecasting firm earnings; (2) apply these relationships to project individual analyst future earnings forecast accuracy; and, (3) relate the returns of consensus stock recommendations over holding periods of one, three and six months for the fifths of analysts with the highest and lowest projected earnings forecast accuracies. Using monthly analyst characteristics, earnings forecasts and stock recommendations, along with actual firm earnings and returns for recommended stocks, spanning 1994 through 2007 (168 months), they find that: Keep Reading

A reader commented and asked: “The problem with SSRN is that most papers published there are working papers, placed there to receive comments. Before any of these papers appear in a journal, they undergo peer review, one of the most important processes in scientific research. Experienced researchers in the field thereby filter out all the mistakes, wrong methods, incorrect conclusions, etc. How do you know that the working papers are not dramatically adjusted before publication in a peer-reviewed journal?” Keep Reading

Why does the public resist the wisdom of scientific consensus on “questions only they [scientists] are equipped to answer?” In their February 2010 article entitled “Cultural Cognition of Scientific Consensus”, Dan Kahan, Hank Jenkins-Smith and Donald Braman examine the tendency of individuals to perceive risk with biases congenial to their visions of how society should be organized. The authors focus on the examples of climate change, disposal of nuclear waste and the effect of permitting concealed possession of handguns. They measure individual cultural predisposition along two dimensions: hierarchy versus egalitarianism, and individualism versus communitarianism. Using results of an online survey of 1,500 U.S. adults during July 2009, they conclude that: Keep Reading

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