From
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research paper recently covered at CNNMoney.com surveyed finance professors, finding that many took their own teachings to heart. About two-thirds didn't try to beat the market, investing instead in index funds, and steering clear of picking individual stocks. Almost 15% had never purchased a single stock!
But a minority of these professors, the active traders, did pick stocks, and did try to beat the market. However, rather than using the sophisticated models and theories about risk and asset pricing that they taught their students, the study reports that these professors looked at a firm's fundamentals (such as P/E ratio) and the momentum in its stock price -- how it performed recently, compared to
52-week highs and lows. In other words, they were chasing performance!
The researchers fittingly wonder why finance professors spend so much time researching sophisticated risk models if those models are "glaringly unimportant" in the real world. Finance professors who want to beat the market ignore their own (well-researched) advice and just chase the hot stocks.
Abstract of paper, from
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:This paper asks the simple question of what matters to individuals when they buy and sell stocks. To answer this question, 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. ----
Editorial comment: But I am sure the "sophisticated" models are still financially important to these faculty. They ensure a steady stream of "research" enabling promotion and tenure and so more job income.
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