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Our Research Approach Efficient Market Theory Our approach: Research shows that no investor or even professional fund manager can consistently gain a reliable advantage over all of the other market participants. Asset prices quickly and fully reflect the knowledge and expectations of investors. i.e. stock selection and market timing provide little value. Therefore we do not pick particular stocks or markets and consider that trying to time market entry is not productive.
The research: Comments on Overall Theory Efficient Capital Markets: A Review of Theory and Empirical Work The Journal of Finance Eugene Fama May 1970, Vol. 25, No. 2: 383-417
What the paper says: Security prices at any time fully reflect all available information.
In the author's own words: "In short the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."
As applied to "Stock Analysts" Prophets during doom and gloom downunder Global Finance Journal Sarah Azzi and Ron Bird May 1970, Vol. 25, No. 2: 383-417
What the paper says: Over the entire period of the study (1994 to 2003), shares with both 'strong buy' and 'buy' recommendations underperformed the average market return. Over the poor period of market returns, analysts appeared to perform even worse. The average 'sell' recommendation outperformed both 'strong buy' and 'buy' recommendations over the poor period of market returns.
In the author's own words: analyst recommendations, "if anything, have negative value".
As applied to "Fund Rating Agencies" Morningstar Ratings and Future Performance Accounting and Finance Paul A. Gerrans December 2006, Vol. 46, No. 4: 605-628
What the paper says: This paper explores the relationship between Morningstar, qualitative and quantitative ratings and future fund product performance. Results do not support predictive power in the ratings, in the relatively short periods available for analysis, using a range of commonly used performance measures.
In the author's own words: "Overall, the evidence does not support the view that five-star funds will subsequently outperform lower rated funds"
As applied to "Individual Investors" Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors The Journal of Finance Brad M. Barber and Terrance Odean April 2000, Vol.
What the paper says: Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading.
In the author's own words: "Our central message is that trading is hazardous to your wealth"
As applied to "Media coverage" Are Cover Stories Effective Contrarian Indicators? Financial Analysts Journal Tom Arnold, John H. Earl Jr. and David S. North March/April 2007, Vol. 63, No. 2: 70-75
What the paper says: Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance.
In the author's own words: "As one might expect, positive feature stories headlined on business magazine covers follow extremely positive company performance and negative headlines follow extremely negative performance. In both cases, however, the appearance on a cover of Business Week, Fortune, or Forbes tends to signal the end of the extreme performance."
The next page in the research story - Active Fund Managers Underperform
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