And what do the investors think?

We survey a representative sample of U.S. individuals about how well leading academic theories describe their financial beliefs and decisions. We find substantial support for many factors hypothesized to affect portfolio equity share, particularly background risk, investment horizon, rare disasters, transactional factors, and fixed costs of stock market participation. Individuals tend to believe that past mutual fund performance is a good signal of stock-picking skill, actively managed funds do not suffer from diseconomies of scale, value stocks are safer and do not have higher expected returns, and high-momentum stocks are riskier and do have higher expected returns.

That is from a new paper by James J. Choi and Adriana Z. Robertson.


Here's a good laugh: Serious investors rely on an analysis of discounted cash flows and other fundamental factors for picking stocks. Did I mention that hedge and other investment funds are replacing analysts with software engineers and quants.

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The financial media is obsessed with the word investors. It appears everywhere in the WSJ, The Economist, Financial Times, etc. All events and conditions are measured against what anonymous investors might think about them. But investors are individuals that already have money or they wouldn't be able to invest. The idea that their making even more of it is of little interest to the rest of the population. The reality is that there is an industry that by hopefully increasing an investor's worth will be able to skim a portion of the increase. That's what it's actually all about.

The best paper ever on small investor logic is this one: Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors by BRAD M. BARBER and TERRANCE ODEAN, THE JOURNAL OF FINANCE • VOL. LV, NO. 2 • APRIL 2000

Bonus trivia: Investing is big business, starting with the godmother of investment advice, Sylvia Porter, who got rich selling pedestrian advice, ditto Jane Bryant Quinn and Suze Orman (no coincidence all three are women, since Porter was the pioneer), and noting that 33% of all print ad revenue comes from financial services advertising.

"Pedestrian" advice on personal finance can be useful. Lots of people don't understand the most basic things about their finances.

OTOH, most advice on investing worth less than nothing, since it will be costly to follow it. There is a large industry built on generating anxiety about personal investment and then offering self-serving advice and overpriced services to calm it.

IMO, much of this, including a fair amount offered by big name firms, is fraud, in an ethical if not legal sense.

People invest in what they are willing to be blamed for.

Of note is the column in yesterday's WSJ which questions the idea that "value stocks" (which have historically outperformed growth stks) are (or will ever be again) "due for a comeback". Argues that with more "value" being in intellectual property, networks & branding that past criteria for categorizing "value" stocks is no longer valid (and explains why it's been so long since "value" had its day). IOW, the value stock picks are using the wrong measure of value (and the "right" measure is increasingly difficult to determine - unlike physical assets, intellectual property can NOT be clearly (lol) priced. At least, iirc.

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