Investing Expertise

Are hedge fund managers the best and brightest when it comes to stock picking and market timing? In their March 2007 paper entitled “How Smart are the Smart Guys? A Unique View from Hedge Fund Stock Holdings”, John Griffin and Jin Xu investigate whether hedge fund managers are better at picking stocks and investing styles than mutual fund managers. Using the stock holdings of 306 hedge fund companies from 1980 to 2004 as reported in quarterly SEC Form 13F equity filings, they conclude that: Keep Reading

How do analyst earnings forecasts vary across financial reporting periods? Does the desire of analysts to maintain a good relationship with firm management affect earnings forecasts? In their February 2007 paper entitled “Relationship Incentives and the Optimistic/Pessimistic Pattern in Analysts’ Forecasts”, Robert Libby, James Hunton, Hun-Tong Tan and Nicholas Seybert report the results of controlled blind experiments involving experienced sell-side financial analysts that address these questions. Using information gained from “training sessions” for a group of 47 analysts from a single large investment banking/brokerage firm and 34 analysts from a medium-sized regional brokerage firm, they conclude that: Keep Reading

Suppose quack financial advisors offered their services to naive investors. What would happen? In the December 2005 version of his paper entitled “The Market for Quacks”, Ran Spiegler applies game theory to a scenario that fits by analogy. He imagines a group of “quacks” in a price competition to attract and retain “patients” who recover with some probability, regardless of whether they pay a quack for “treatment.” If the patients were rational, they would induce that the quack services are worthless and would acquire none. However, if the patients succumb to anecdotal evidence (random, casual stories rather than statistically reliable analyses), he deduces 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 February 2007 paper entitled “Stocks of Admired Companies and Despised Ones”, Deniz Anginer, Kenneth Fisher and Meir Statman test these hypotheses. The authors define state of admiration using Fortune magazine’s annual survey-based lists of “America’s Most Admired Companies.” 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 2006, associated stock return data and a separate survey of high-net worth investors, they conclude that: Keep Reading

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