Can Academics Mess With Your Investment Strategy?
- Joshua M Brown
- November 5th, 2012
Dogs of the Dow, Dow Theory, 10-Month Moving Average, Earnings or Dividend-Weighted Indexing, Growth At a Reasonable Price etc – everyone’s got their bread-and-butter investing strategy. But what if just by merely publishing research on these styles, the academic community could incapacitate their efficacy forever?
Counterparties just turned me on to this story, I haven’t quite formulated an opinion on it yet or the ramifications if I were to believe it to be true (which I probably won’t upon close inspection).
But it’s too juicy not to share with you guys…
Academics are often called out of touch or cloistered, and are condemned for pursuing research that’s irrelevant to daily life. New research, however, points to a powerful exception:
Simply by publishing an academic paper, a professor can demolish your investment strategy.
Buy stocks that recently did well, focus on firms that reinvest profits—it doesn’t matter. If a finance scholar writes about your strategy, over the next decade or so your returns will shrink by more than one-third.
That’s true for 82 different strategies that have been described in finance journals, say David McLean, a visiting associate professor of finance at the Massachusetts Institute of Technology’s Sloan School of Management, and Jeffrey Pontiff, a professor of finance at Boston College. The duo describe their findings in a working paper that has been presented at several finance conferences this year, most recently at the University of Luxembourg. Its title: “Does Academic Research Destroy Stock Return Predictability?” The answer: Yes.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.