If someone tells you they have come up with an investing system or methodology that delivers a predictable edge over ordinary stock-market returns, they may be right.
Shutterstock.comThey just won�t be right for the long.
In the stock market�s unique way of beating up on braggarts and know-it-alls, the fastest way to turn market-beating methods into average results is to let the world know what you�ve got. In fact, a recent study that looked at academic research purporting to give investors an edge found that the mere act of publishing a research paper to announce the results to the world was enough to crush the advantage of the strategy.
And that�s writing for academic journals, it�s not basing a mutual fund, newsletter or any other investment product that might be selling its strategy as delivering a specific above-the-norm difference.
That�s why any investment strategies that purports to surpass market returns by a predictable amount should be labeled �the Stupid Investment of the Week.�
Click to Play Have a Market-Beating Strategy? Keep It QuietAny investing purporting to follow a strategy that surpasses the market returns by a predictable amount is the Stupid Investment of the Week. Chuck Jaffe reports on Markets Hub. Photo: Getty Images.
Stupid Investment of the Week highlights the conditions and characteristics that make a security or strategy less than ideal for average investors, and is written in the hope that pointing out danger in one situation will make it easier to sidestep trouble elsewhere.
After a nearly 10-year run, this will be the last time the we single out a specific strategy. The column will be ending in the next few weeks, after a review of the best and worst picks of the last decade, and the lasting lessons it has produced. It�s not that there are no more stupid investments � or even that all of the lessons have been learned � but rather that I want to find other ways to tell these stories, and a decade of mocking stupidity is sufficient.
That being the case, the idea of avoiding anyone proffering a predictable market edge is important, because it has been the hallmark of many stupid investments.
The problem with such claims is clearly pointed out in a recent research paper � Does Academic Research Destroy Stock Return Predictability,� written by David McLean, a visiting professor at MIT Sloan, and Jeffrey Pontiff of Boston College.
The professors looked at 66 different studies which basically plumbed the depths of 82 different market anomalies that were supposed to lead to predictable gains.
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The academics weren�t trying to predict market returns, but instead were looking at theories like �low- priced stocks do better than high-price stocks,� or �stocks with strong six-month momentum will continue their strong results for another six months.�
Of course, academic studies have some real-world flaws. They typically ignore trading costs and other friction that real-world investors can�t shake off. That�s why it can be tough to implement these strategies to get what the academics predicted.
But it gets worse.
�After the paper has been published, it looks like people do start to trade on these and the average strategy declines by about 35%,� said McLean, �so if a published paper says you can make X-percent returns on this strategy, after the paper has been published the return is 35% lower.�
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