Last week, Noah Smith prompted a lot of discussion in the blogosphere with his posting, “Does trend-chasing explain financial markets?”Noahpinion | Smith is an assistant finance professor at Stony Brook University and writes for The Atlantic and other publications. It was complete with a photo of bison charging at the viewer, visually emphasizing the instinctual reaction to join the crowd rather than to stand against it.
Smith linked to a variety of academic studies about the nature of the stock market, focusing his narrative on two competing philosophies of investor behavior: “extrapolative expectations” (chasing the trends) and “rational expectations,” the bedrock of most academic finance work. (Presumably, the debate would be similar with other asset classes, but it always seems to be about stocks.)
Among the questions prompted by the piece: Is “trend-chasing by quasi-rational investors . . . the big force behind long-term stock ... continues
I recently created an online investment “challenge.”CredSpark | The site on which the challenge is found is in beta, so any feedback would be appreciated. The questions cover quite a range of topics, some of which can be answered simply on the basis of investment knowledge and some which require awareness of specific market and industry events of 2013.
It’s hard. As of this writing, the average number of correct answers (out of 24) is 15, three less than the “passing” bar that I set. No one has gotten all of the answers right. Furthermore, of a handful of seasoned investment professionals that voluntarily reported their scores to me, some barely passed and some failed.
That’s not particularly surprising, in that most people in the industry are specialists, and it is a broad-based test. In addition, some questions were hard for reasons that had nothing to do with investment expertise.
Creating the challenge and evaluating the results have ... continues
We are in the season of looking back and looking forward, prompted by the turning of a new year that reminds us of the relentless passage of time.
In many ways, one year doesn’t tell us very much, although you will soon be reading lots of stories about the best asset classes and the best managers of 2013. In isolation, that information will have little value and may prove to be counterproductive, but it will be hard to resist the pull of recent success.
In the context of history and its patterns, the results might tell you more. So, how many years do you need for the evidence to become meaningful? There are statistical answers to that questionthe research puzzle | Which are often ignored, as this piece on the Sharpe ratio indicates. — or you can observe industry practices (including the apparently magical flip of a switch when a track record reaches three years) — but no precise answers are available.
Of late, I have been thinking in seven-year periods. You ... continues
You bought some shares in a company on Tuesday. I have a question: Are you an owner or a renter?
Technically, assuming you haven’t flipped them already, you are an owner — of the shares and therefore of some portion of the company in question. But are you really an “owner”?
I ask because the market is full of renters and there aren’t that many owners. The reasons for your purchase — and your expectations going in — say a lot about which category that you fall into. In that regard, my question is a bit reflective of a CFA Institute forum I participated in last summer on “investing versus speculation.”research puzzle pix | This posting includes a chart about one exchange during that forum and includes links to it. (Since we are dealing with semantics here, notice the difference in the two words used for the debate. “Investing” is a verb, signifying a process, whereas “speculation” is a noun, ... continues
If you’ve been on the receiving end of pitches by asset managers, you have seen something like this: “Our investment team has a combined 138 years of experience.” Let’s think about that.
The assumption, of course, is that more experience is better than less experience, and it is reasonable to think that is the case under most circumstances. However, those who have been around a while know that in frisky markets it often pays — at least temporarily — to not have had the experience at all. Those of us with scars from previous frisky periods have a hard time throwing caution completely to the wind, having seen the results before. The neophytes will have their scars soon enough, but if the cycle has some length to it they can gain assets and fame in size as they ride the new wave.
But for the most part, experience is viewed as a very good thing, thus the marketing construct of adding up the years that the members of the team have been toiling ... continues