Investing Research Articles

In the February 2005 issue of The Financial Review, Burton Malkiel offers “Reflections on the Efficient Market Hypothesis: 30 Years Later” as a pudding-based proof of his famous proposition. He pits the performance of professional investment managers against that of market indices and finds that:

…21st-century investors should curb their exuberance.

…short selling is more effective at buffering exuberance for individual stocks than for the overall market.

…mutual fund inflows naively chase past returns.

…the media constitute a possibly destabilizing element, since they support the continuation and reinforcement of states of disequilibrium, or maybe even trigger them.

…investor emotions drive market volatility, but there is an asymmetry to fear and greed.

…individual investors should be wary of investing in stocks that are the top mutual fund holdings.

…portfolios built using aggregate analyst recommendations may produce gross outperformance, but transaction costs absorb excess returns. Moreover, privileged investors get the jump on analyst-driven trades.

…the Fed Model has worked pretty well starting about 1960, with interest rates since playing a key role in stock valuation.

In their June 2003 paper entitled “A General Theory of Stock Market Valuation and Return”, Christophe Faugere and Julian Van Erlach contend that past stock returns are overstated and develop a market valuation formula that out-fits the Fed Model. Specifically, they show that: