I wonder how the aggregate return of all stockholders can be different
from buy and hold return by anything than the amount of transaction
costs, if at any moment of time a stock is held by a member of the
agregate.

i

beliavsky[at]aol.com wrote:
- quote -

B,
I don't think this at all reflects investors' actual experience. The
study seems to be measuring the IRR that would be experienced by the IPO
junkie who only buys stocks at their initial offering. But the typical
investor (including institutional) is "born into" an existing equity
market, accumulates cash, and then invests most (or even all) of it
through the secondary market.

So I would draw a different conclusion - or really, affirm an old one
that's been demonstrated in a lot of other studies - which is that IPO
valuations are on average far too high. So an investor is much better
rewarded by avoiding IPO stocks and buying existing issues that have had
time to be "appropriately valued" by the market. Demonstrating this
point through an "IPO IRR" is interesting, most studies I've seen focus
on the short-term results (the few years after issue).

I wonder how much the 99-00 inflows skewed the results. It's amazing to
think of $1T in cash going into all that garbage. Though I guess a lot
of the $1T was funny money anyway, spooled up from the "last" IPO and
rolled into the next one.

And for the investor with unlimited cash it suggests there might be a
positive strategy that is short IPO Nasdaq stocks and long the market ex
those issues.

-Tad

A recent paper has studied the historical internal rate of return
(IRR) of the
stock market, taking into account the timing of inflows (equity
offerings) and outflows (dividends and stock buybacks). The IRR better
reflects investors actual experience than the buy and hold return
(BHR) usually cited. For NYSE/AMEX stocks that IRR has been 1.3% lower
than the BHR from 1926-2002.
The most surprising finding is that the IRR for Nasdaq stocks has been
only
4.3% from 1973 to 2002, less than half of the BHR of 9.6% over the
same period.

As the author explains on p14,

"The [cash inflows to Nasdaq stocks] in years 1999 and 2000 especially
stand out, at a combined value of more than $1 trillion. This last
evidence, coupled with a consideration of the large negative returns
in years 2000, 2001, and 2002 (-39.6 percent, -20.8 percent, -30.9
percent), yields the impression that investors essentially poured in a
huge amount of capital exactly at the worst possible time in
Nasdaq’s
history."

The conclusion I draw is that stocks in general, and Nasdaq stocks in
particular, have not been as good for investors as BHR returns would
indicate.
I wonder if this holds for for assets like bonds and real estate.
Below is the title and abstract -- the paper can be downloaded in PDF
from http://papers.ssrn.com/sol3/papers.c...ract_id=544142 .

What are Stock Investors' Actual Historical Returns?
ILIA D. DICHEV
University of Michigan Business School
Abstract:
This study is based on the observation that stock investors' returns
are determined by two factors: the returns on the securities they hold
and the timing of their capital flows into and out of these
securities. However, existing evidence typically uses buy-and-hold
returns to assess the return experience of stock investors,
essentially ignoring the effects of capital flow timing. This paper
suggests a new and more accurate measure of stock investors'
historical returns, which involves dollar-weighting of returns and
properly reflects the effect of investors' timing. Theoretically, the
essence of dollar-weighted returns is that they value-weight both the
cross-section and the time-series of returns. In practical terms,
dollar-weighted returns are computed as IRRs from investment projects
in which initial market values and contributions from investors (e.g.,
stock issues) enter with negative signs, and distributions to
investors (e.g., dividends, stock repurchases) and final market values
enter with positive signs. The empirical results indicate that
aggregate dollar-weighted returns are systematically and considerably
lower than buy-and-hold returns. The difference is 1.3 percent for the
NYSE/AMEX market over 1926-2002, 5.3 percent for Nasdaq over
1973-2002, and averages 1.5 percent for 19 major stock markets around
the world over 1973-2004. Thus, this study provides comprehensive
evidence that stock investors' actual returns are considerably lower
than those from passive holdings and from those documented in the
existing literature on historical stock returns. These results have
implications for the debate on the equity premium, for the literature
on long-run returns following capital flows, for building successful
investment strategies, and others.
Keywords: Stock returns, capital flows, dollar-weighting
JEL Classifications: G1, G12, G31