Take Finance Professors’ Advice — They Aren’t Trading On It

Funny new paper out look at stock-trading habits of finance professors. Of those trading stocks at least monthly, most are using fundamental factors like P/E and market cap, as well as technical factors like momentum, to rate stocks, not the high-falutin’ stuff they teach MBAs. Maybe that’s because, as the paper points out, they don’t have much, you know … experience actually buying and selling stocks, beyond the basics.

… we surveyed all finance professors at accredited, four-year universities and colleges in the US to assess our profession’s collective opinion on the matter. Our sample of 642 useable responses indicates that over two-thirds of the sample are passive investors, and not because they don’t have the time to invest. The responses for all investors indicates that the traditional valuation techniques (specifically, the dividend-based valuation models) and the traditional asset-pricing models (namely the CAPM, APT, and Fama and French and Carhart models) are all unimportant in the decision of whether to buy or sell a specific stock.

Instead, finance professors, particularly finance professors who trade stocks at least monthly and who admit they are trying to “beat the market” with their investment dollars, believe that firm characteristics (especially, a firm’s PE ratio and market capitalization), along with momentum related information (a firm’s returns over the past six months and year and a firms’ 52-week low and high) are most important when considering a stock sale and purchase.

We also show that finance professors have less investing experience than one might expect, especially in the areas of margin trading, short selling, and derivatives.

Related posts:

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  2. Making professors obsolete
  3. How Yahoo Finance Begat Google Finance
  4. Insider Trading in Martha’s Insider Trading Case
  5. Fun with Relative Value Pairs Trading

Comments

  1. Shefaly says:

    The simple explanation? A great post by Ben Casnocha:
    http://ben.casnocha.com/2007/04/the_inverse_cor.html

  2. I buy that for sure. I also think it is one of those strange things that the market does to people. It convinces them, like any good casino, that they have an edge, and they can trade/act in ways that loses money for everyone else but them.

  3. And relatedly, it also explain another longstanding puzzle in academic finance: Why finance academics publish. After all, there are many interesting example of how anomalies or ideas identified by finance academics, and then published in refereed journals, were taken up or integrated into highly profitable trading strategy elsewhere.
    Why dont the finance guys do it? Its like a Qualcomm generating profitable IP, and then giving it all away in trade journals. The answer has partly to do with process — finance academics dont have the systems in place to exploit the strategies — but i think its mostly about their ardor for puzzlesolving. Many finance academics treat the market as a data machine that produces puzzles. Trading and puzzle-solving are different activities. Q.E.D.

  4. Franklin Stubbs says:

    There is an even simpler explanation: “Those who can’t do, teach.”
    Those who can do both tend to leave academia behind. The puzzle-solving pay at Renaissance, Goldman, Barclay’s etc. is just a wee bit better.

  5. burton says:

    Or maybe finance professors read the empirical literature.

  6. P- says:

    Nice piece of Apple
    http://www.itwire.com.au/content/view/11346/1023/
    iPhone may become just a niche product like the Mac is but there maybe a couple of different dynamic force streams at play here. Apple wasn’t anywhere where it is now developing iPhone as it was developing the PC. With iPhone it maybe a latecomer to compared to more mature cos. like Nokia, Motorola or even the service providers. It really depends on how well this co can leverage its’ dominance in iPod and iTunes into anything of substance for iPhone interms of customers and marketshare.
    http://finance.groups.yahoo.com/group/invest_mavin/

  7. Burton — Nah, you think :-) ?

  8. Dave says:

    Those who can’t teach, teach gym

  9. Andrew says:

    All of the above seems to assume that the finance profs who responded to the survey did so truthfully.

  10. franklin stubbs says:

    “All of the above seems to assume that the finance profs who responded to the survey did so truthfully.”
    And the reason for lying would be what, exactly? A sinister plot to undermine the reputation of their own field?
    “Mmmm yes… I actually DO have hands-on experience with financial instruments… and I actually DO use all these arcane formulae in the making of investment decisions… but I am going to pretend NOT to be experienced, and NOT to use the stuff I teach every day–just to throw them off track! My evil genius will never be detected! Muhahaha!”

  11. pastahero says:

    642 responses out of how many thousands? And do the authors distinguish between full-time academics and practicioners who decided to teach after making a killing in the markets?