On Mar 4, 10:00*am, "Elle" <honda.lion...[at]spamnocox.net> wrote:

- quote -

The traditional valuation techniques don't look at what is being
produced by the corporations. An investor can't get enthusiastic about
an investment if there isn't going to be strong demand for the
products being produced.

For instance, with energy costs increasing any device that will lower
energy consumption or produce an alternative will find new investors.

--
Ron

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"TB" <borekfm[at]pacbell.net> wrote
- quote -

Effectively and fairly critiquing a 43-page paper surely
requires more than a few minutes. I spent an hour reading it
yesterday. Every concern you raised, plus other concerns the
authors raise about the results so as to try to be fair and,
ya know, get at truths, is addressed. Like any good
research, it begs other questions for further study.
Interested people may read the paper themselves, downloading
it for free at
http://papers.ssrn.com/sol3/papers.c...ract_id=980364 .

I realize further discussion is likely off-topic.


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Elle wrote:
- quote -

Fool/CNN didn't appear to read the actual paper. Give it just a few
minutes, the research is sloppy but even what they came up with says
something different. There are problems in the imprecise way they asked
questions, the inconsistencies in responses, and the lack of analysis of
the data they collected. It certainly doesn't show that the
stock-pickers weren't using the models they teach...the survey forgot to
ask about what they taught so how could we know? And it didn't even
cross reference "what I believe" responses with "how I invest"
responses, which would be required to make the claim that they don't eat
what they cook.

And somehow the charts all have size, value, beta and momentum coming up
as important factors in stock selection, but the researchers concluded
they weren't using finance models. Except of course the models that talk
about size, value, beta and momentum as the important factors.

And really, Fool/CNN buried the lead, which was "Survey says
overwhelming majority of PhDs in Finance choose indexing." That's a good
take-away for an individual investor, and is of course consistent with
academic research. Note however that the sample group probably invested
primarily through their 403b plans, given the median salary mentioned in
the paper and their careers/employers. So that may explain the high
percentage of index mutual fund ownership. But we can only speculate
because they didn't ask about that either.

There is some irony to citing an academic paper - especially a weak one
- as part of a general assault on financial academicians.

-Tad

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<beliavsky[at]aol.com> wrote
snip; I do not see how your point answers my own. In fact,
we agree that it does not take a PhD in finance to invest
successfully. Perhaps we also agree with the statements
quoted in my original post: Two-thirds of the profs take
their own advice.
- quote -

Please know again that I am speaking to a larger audience,
not merely you, when I point out that my general reading
indicates that the "pros" are just about as incapable as the
amateurs. Most pros are as incapable as amateurs, I'd say,
unless one wants to split hairs over what a "pro" is.

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On Mar 4, 11:00 am, "Elle" <honda.lion...[at]spamnocox.net> wrote:

- quote -

Buffett, Graham, and Shiller are all much smarter than the average
person, although Buffett often tries to present himself as an ordinary
guy. In his latest Berkshire Hathaway letter http://www.berkshirehathaway.com/letters/2007ltr.pdf
he atttributes part of his success to superior innate ability 'a
"business" gene', and I don't think he is boasting:

"At 84 and 77, Charlie and I remain lucky beyond our dreams. We were
born in America; had
terrific parents who saw that we got good educations; have enjoyed
wonderful families and great health;
and came equipped with a "business" gene that allows us to prosper in
a manner hugely disproportionate to
that experienced by many people who contribute as much or more to our
society's well-being."

Of course, you have a habit of vigorously denying things that have not
been asserted. One can invest successfully without a PhD in finance by
using a diversified group of mutual funds, and the professors
themselves (such as Malkiel) have written books about this. What is
doubtful is that many amateurs are capable through individual stock
picks of assembling portfolios of stocks that will outperform the
stock market on a risk-adjusted basis.

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On 2008-03-04 10:00:42 -0800, dsmoore[at]stat.purdue.edu (David Moore) said:

- quote -

Good point. It would also be interesting to see statistics on how the
people who write books on financial planning, the splashy ones that
sell to the public in bookstores, actually invest their own money. I
would hazard a guess the some of the authors who write about the latest
plan or strategy for getting rich stay far away from it with their own
money. Also, I would like to see the portfolios of securities analystys
and others who recommend particular stocks in newsletters. I would
guess they do not always follow their own "buy," and "hold,"
recommendations, and I would also guess they "sell" a lot more often
than thety recommend in their newsletters. How many commissioned sales
people buy the mutual funds they recommend? Data about all these
things, if it were possible to get it, would be an excellent source of
information for ordinary investors. Many investors who do not uderstand
all the intricate details of finance might well understand the meaning
of "Do as I say, not as I do," and profit by applying that information
to their own decisions.

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"David Moore" <dsmoore[at]stat.purdue.edu> wrote
- quote -

It seems to me you just repeated what my original post
already stated. See the part that says two-thirds of finance
professors "took their own teachings to heart" and bought
index funds.

The focus (in the Motley Fool article and the paper) seems
to be on the one-third who blew off indexing and instead
chose to pick stocks, but not using any of the complicated
traditional models they teach.

Aside: From my reading, small cap index funds are not proven
the way larger cap ones are.

The question is still begged as to whether the one-third of
finance professors in this study who consider themselves
mavens of stock picking are beating the market. Or are they
vulnerable to the same temptations that many hum-drum day
traders are? It's worth seeking other papers that study
this.

I do agree we should trumpet the likes of certain finance
(or specialized econ) professors. E.g. Professor Jeremy
Siegel, now an advisor to WisdomTree investments, and owner
of 2% of the company. Also Professor Robert Shiller, whom I
mentioned earlier. Fortunately this newsgroup regularly
refers to the teachings of some of the greats, even if it is
only by implication when, say, index funds are recommended.

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Do note that the 2/3 of finance professors who are passive investors
may well be using the results of e.g. the Fama-French three-factor
model: they just choose index funds for the small and value asset
classes to complement a total market or other large growth dominated
index fund. That's what I do, though I'm a statistics professor
rather than a finance professor. So academic research such as that
of Fama and French should not be sneered at.

David

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<beliavsky[at]aol.com> wrote
- quote -

Wouldn't you like to know why they overwhelmingly do not
themselves apply the "traditional valuation techniques
(specifically, the dividend-based valuation models) and the
traditional asset-pricing models (namely the CAPM, APT, and
Fama and French and Carhart models)"? Isn't this worthy of
further academic study? Or are you not serious about the
truths that academic research reveals?

I posted for the general reader here, not you. No one should
be duped into thinking that investing successfully is so
terribly complicated. People as extensively educated as
Warren Buffett, Ben Graham, and Robert Shiller, tend to
agree, from my reading.

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On Mar 4, 8:15*am, "Elle" <honda.lion...[at]spamnocox.net> wrote:
- quote -

Finance professors have written papers documenting the value and
momentum anomalies, some of which I have cited in this group, and they
appear to be exploiting those anomalies in their own investments. I
don't know why you sneer at them, other than that being your general
disposition.

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- quote -

A research paper recently covered at CNNMoney.com surveyed
finance professors, finding that many took their own
teachings to heart. About two-thirds didn't try to beat the
market, investing instead in index funds, and steering clear
of picking individual stocks. Almost 15% had never purchased
a single stock!

But a minority of these professors, the active traders, did
pick stocks, and did try to beat the market. However, rather
than using the sophisticated models and theories about risk
and asset pricing that they taught their students, the study
reports that these professors looked at a firm's
fundamentals (such as P/E ratio) and the momentum in its
stock price -- how it performed recently, compared to
52-week highs and lows. In other words, they were chasing
performance!

The researchers fittingly wonder why finance professors
spend so much time researching sophisticated risk models if
those models are "glaringly unimportant" in the real world.
Finance professors who want to beat the market ignore their
own (well-researched) advice and just chase the hot stocks.

Abstract of paper, from
http://papers.ssrn.com/sol3/papers.c...ract_id=980364 :
This paper asks the simple question of what matters to
individuals when they buy and sell stocks. To answer this
question, we surveyed all finance professors at accredited,
four-year universities and colleges in the US to assess our
profession's collective opinion on the matter. Our sample of
642 useable responses indicates that over two-thirds of the
sample are passive investors, and not because they don't
have the time to invest. The responses for all investors
indicates that the traditional valuation techniques
(specifically, the dividend-based valuation models) and the
traditional asset-pricing models (namely the CAPM, APT, and
Fama and French and Carhart models) are all unimportant in
the decision of whether to buy or sell a specific stock.
Instead, finance professors, particularly finance professors
who trade stocks at least monthly and who admit they are
trying to "beat the market" with their investment dollars,
believe that firm characteristics (especially, a firm's PE
ratio and market capitalization), along with momentum
related information (a firm's returns over the past six
months and year and a firms' 52-week low and high) are most
important when considering a stock sale and purchase. We
also show that finance professors have less investing
experience than one might expect, especially in the areas of
margin trading, short selling, and derivatives.
----

Editorial comment: But I am sure the "sophisticated" models
are still financially important to these faculty. They
ensure a steady stream of "research" enabling promotion and
tenure and so more job income.


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