RE: re : securities analysis
Anecdotally (speaking as a fund manager) it 'feels' like the January effect is happening in Q4 as investors try and front run the January performance. David -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]] On Behalf Of Bryan Caplan Sent: 05 April 2002 20:34 To: [EMAIL PROTECTED] Subject: Re: re : securities analysis William Dickens wrote: However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
But the real question is whether there were any clustering in the attributes of the minority who consistently beat the market. If there is a strong clustering of attributes (they ate the same brand of corn flakes for many many years or went to the same school or followed the principles of the same Guru of investing or whatever ...) obviously then there is some causal variable that may explain the phenomenon and it would not be scientific to dismiss this clustering by taking the argument that majority under performs the market anyway. There is strong evidence against clustering. Clustering would imply that there should be a fairly strong correlation between who outperforms the market in one year and who outperforms the market in the next. A study done a few years ago (NBER working paper - - I don't recall the authors) showed that there was a statistically significant, but vanishingly small, correlation in the performance of publicly traded funds from one year to the next. So you can increase your expected return a tiny bit above the average for all mutual funds by picking a fund that performed well in the previous year, but from what I remember it wasn't enough of a gain in expected performance to overcome the under-performance due to over-management [*whew*]. So then what should we make of the fact that several people who follow a particular strategy have all done well? Nothing at all. Suppose that I profess to the world that the thing to do today is to own gold and drug stocks. Suppose that I happen to get lucky and those two assets do particularly well over the next five years. Would anyone be surprised if dozens of people from the golden-drugs school also did well? In the example cited above one would need to look deeper. Have all these people done well picking different stocks using the same principles or does the fact that they ascribe to the same principles mean that they have all picked mostly the same stocks and therefore had highly correlated returns? If the latter then there is no more of an insult to efficient market theory than if one person had done very well for the same length of time. And in a market with lots of participants that will happen frequently. All that aside, there is evidence that value investing works and that is an anomaly. However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. One other thing. I very much liked Alex's thoughtful commentary on this. As he noted, there are lots of anomalies that can mean that stocks are badly mispriced, but that doesn't necessarily mean that there are guaranteed excess returns out there. This was the point of Summers' old noise trading model. You can have market equilibrium with irrational traders dominating the market, but the additional risk that their behavior induces in the market exactly offsets the increase in expected return that is created by the mispricing that they cause. This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. I haven't met anyone who will argue that Amazon wasn't over priced at that time, and if I hadn't been forced to abandon the position or face bankruptcy I would have made money. However, I couldn't afford the margin calls and ended up losing a lot of money on the deal. Insult was added to injury when a year after I was forced to abandon my position I had to sit at a dinner table listening to someone brag about how much money he had just made shorting Amazon.com, and about how stupid participants in the stock market obviously are. When I asked him how he had decided when to take his short position he cited an argument with another person over market efficiency as the precipitating incident - - in other words dumb luck. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: re : securities analysis
This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. William T. Dickens But those who bought long-term put options (LEAPs) on Amazon could lose no more than than their financial investment, and the put options could be held or others bought until the downturn, with no margin calls. Fred Foldvary = [EMAIL PROTECTED] __ Do You Yahoo!? Yahoo! Tax Center - online filing with TurboTax http://taxes.yahoo.com/
Re: re : securities analysis
William Dickens wrote: However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
William Dickens wrote: This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. Why didn't you take a series of smaller short positions instead? You could have held a $1000 short position for twenty times as long, no? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
But those who bought long-term put options (LEAPs) on Amazon could lose no more than than their financial investment, and the put options could be held or others bought until the downturn, with no margin calls. The Longest term option that was availale wouldn't have gotten me far enough to have made money and the premium was _huge_. - - Bill
Re: re : securities analysis
So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? So if you invest in stocks in January and bonds the rest of the year and the bonds earn 80% of the average annual return of stocks you get ~10.5% return vs. 9.3% from stocks vs 7.2 from bonds. If most of the volatility in stocks is in January as well you don't save much on risk premium. Not hard to imagine that the tax cost of getting in and out of stocks every year could dominate an extra 1.2% return. That plus I thought I remembered that Thaler's January effect has been more subdued since he wrote his article. Thaler advises a fund and I haven't heard that it is head and shoulders above other funds. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
