The Stingy News Weekly (06/08/2014)
Portfolio tracking is for losers
"If we can't stop ourselves being biased by market information then we have the alternative of avoiding it. The idea that we should cut ourselves off from our portfolios and limit our exposure to market news is anathema to the majority of us, but we'd probably end up wealthier as a result."
Does Academic Research Kill Returns?
"On average, long-short versions of the 82 investment strategies enjoyed risk-adjusted returns (alpha) of 9.5% per year within the data sample. In the second period, after the initial study was concluded but before the paper was published, the alpha dipped by 13%, to 8.5% annualized. After publication, alpha fell much by the much larger percentage of 44%, landing at 4.8%."
Academic research and return predictability
"We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in published academic studies. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Our findings point to mispricing as the source of predictability. Post-publication, stocks in characteristic portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published characteristics. Consistent with costly (limited) arbitrage, post-publication return declines are greater for characteristic portfolios that consist of stocks with low idiosyncratic risk."
Price to sales ratio backtest
"This backtest of the Price/Sales ratio reveals that the first quintile outperforms the S&P 500 Equal Weight Index benchmark. The second through fifth quintiles have lower average annual excess returns than each of the previous quintiles and the overall trend in excess returns is a linear decrease as the P/S ratio increases."
Price to free cash flow ratio backtest
"This backtest of the P/FCF ratio reveals that the first quintile outperforms the S&P 500 Equal Weight Index benchmark. The second through fifth quintiles have lower average annual excess returns than each of the previous quintiles and the overall trend in excess returns is a linear decrease as the P/FCF ratio increases."
An astonishing record of complete failure
"In the 2001 issue of the International Journal of Forecasting, an economist from the International Monetary Fund, Prakash Loungani, published a survey of the accuracy of economic forecasts throughout the 1990s. He reached two conclusions. The first was that forecasts are all much the same. There was little to choose between those produced by the IMF and the World Bank, and those from private sector forecasters. The second conclusion was that the predictive record of economists was terrible. Loungani wrote: 'The record of failure to predict recessions is virtually unblemished.'"
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