MOST ACADEMIC RESEARCH during the 1960s and early 1970s supported the hypothesis that capital
markets are efficient, Serious chinks in this simple view of investment performance began to appear by the late
1970s and early 1980s.
1 Like
I think Warren Buffett would disagree with this hypothesis. Most of the time it is probably true but there are times when sellers panic. Or the news turns out to exaggerate an item. The pros move in and take advantage. Hats off to the pros smart enough to spot these opportunities.
Which Hypothesis? If you are talking about the Efficient Market Hypothesis, well the paper isn’t supporting that, in fact it is saying that you can beat the index by a wide margin.
2 Likes
The reason we’re so rich is because we always acted consistently with our view of the world, and other people didn’t. It wasn’t because we were so damn smart, it was because we were rational.
–Charlie Munger
5 Likes
{{ An examinationof 222 firms whosestocksat leastdoubledin priceduringone yearof the
1970-83 periodrevealsseveraldistinctfeaturessharedby the majorityof companies }}
You’ll get no disagreement from me that you can do it for one year. But when you look at a 15 year period, 95% of fund managers can’t beat the S&P 500. What’s important is your performance over your investing lifetime.
For the vast majority of people, matching the return of the S&P 500 is fantastic results versus whatever else they would have pursued.
intercst
2 Likes
Not so much recently. When Buffett started out 60 years ago, few people were doing the Graham & Dodd value investing he favors. It was easier to find undervalued assets.
Today there are a lot of hedge funds attempting to do the same thing, so it’s more difficult for Buffett to find winners. More competition makes the efficient market theory more likely correct.
intercst
1 Like
1970-83 was a long time ago. These days excess return anomalies shrink (are arbitraged away) relatively quickly although not necessarily to zero. The exceptions are with microcap stocks where the market is too small for large capital.
DB2
He doesn’t favor Graham and Dodd, that went out the window when he met Munger.
1 Like
I plowed through as much of the article as I could, then skimmed, but nowhere did I find a list of the companies they evaluated.
I thought it interesting that they decided to “exclude certain companies” but they don’t say why, which makes the whole thing suspect, in my mind.
1 Like
I suspect that it is a publication that is not generally available. You would need to find this.
We also garnered our list of “winners” from an O’Neil publication, The Greatest Stock Market Winners: 1970-1983 From Investors Business Daily
For those who are interested, there is 2021research which is a follow-up to the 1988 Reinganum paper.
The Anatomy of a Stock Market Winner Revisited
H. Krogdahl
Abstract:
Reinganum (1988) presented two strategies, consisting of nine and four investment screens. This thesis finds that the four-screen strategy still outperforms the S&P 500 in terms of average excess cumulative holding period return over two years, while the limited number of stocks meeting all nine filter rules makes the nine-screen strategy essentially impossible to implement.
Following the same methodology as Reinganum (1988), this thesis identifies six new investment screens through analyzing common attributes among a random sample of stocks that at least doubled in price within one calendar year.
Based on Reinganum’s (1988) four-screen strategy and this thesis’ constructed six-screen strategy, equal-weighted and value-weighted portfolios are created to examine how the strategies would have performed when backtested on historical data from 2000-2019.
This thesis finds that Reinganum’s (1988) four-screen strategy outperforms the market in terms of both cumulative holding period and risk adjusted returns, where the equal-weighted portfolio is the better investment. The constructed six-screen strategy outperforms Reinganum’s (1988) four-screen strategy when equal-weighted but underperforms when value-weighted. The results are consistent before and after adjusting for transaction costs.
DB2
Yeah, but seriously? If I’m going to publish a paper talking about stock market performance of ~200 specific stocks I’m going to list them so the reader can fact-check if they are so inclined. This is not some dreamy “buy winners, sell losers” thing, they offer a specific formula, run through multiple screens, tested over time, and then - don’t even offer a glimpse of what the inputs might be?
And then go further and say “We eliminated some of the stocks” without saying why, or how that was determined, or what those stocks are either?
Useless. Nonsense. Stupid.
2 Likes
It was written for people subscribed to IBD so they were able to fact-check it. I tried to find the information for you but was unable to find it, I suspect because it was so long ago.
Maybe that is one reason. But it is also important to note that once you have many billions it is harder and harder to find under-valued opportunities that are worth the trouble.
Meanwhile, small individual investors can and do find them, or find new emerging tech companies that do beat the market
Mike