Friday, June 09, 2006

A Neurologist Called Brain and an Economist Called Metrick

You have probably figured out by now that one of my pet peeves is investing "experts" who seem to know a lot less in reality than they would like you to think. Well, I happen to have run into a serious, if old, academic study on my side. (I know that there are thousands on this subject, but I happen to have run into this one.)

It is well known that investment newsletters are considered to be among the cream of the investing resources. Subscriptions cost from a few hundred to well over a thousand dollars a year. In 1997, a Harvard economist with the incredible name of Metrick* did a study of recommendations given by some of the newsletters in the database of the Hulbert Financial Digest. The sample of was large, and included some of the most respected newsletters. Here is Mr. Metrick's abstract:

This paper analyzes the equity-portfolio recommendations made by investment
newsletters. The dataset spans 16 years, is free of survivorship and back-fill biases, and
includes the recommendations of 145 different newsletters. Overall, there is no
significant evidence of superior stock-picking ability for this universe of newsletters.
Some individual letters do have superior performance records, but this does not occur
more often than would be expected by chance, and these records are never more extreme
than would be expected for the sample size. In addition, while there is some short-term
performance persistence, a strategy of buying past winners does not earn statistically
significant excess returns.

You can find the original paper here.

*Don't be too startled at Mr. Metrick's name. There is a famous neurologist named Brain, and I once heard of a less famous one called Megahed. I also once met a gynecologist called Woomer. These things happen.


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