Volume 1, No. 3, Third Quarter 2003
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Insight
Ben Graham’s Value Approach: Can It Still Work?
Price collapses in dotcoms and telecoms have fostered a comeback in the fundamental analysis identified with Benjamin Graham (1894–1976). Defining Graham’s method is no simple task, however; his thinking evolved considerably over a 60 year career. Reducing Graham’s approach to a quantitative formula does not produce superior performance. His most celebrated pupil,Warren Buffett, freely acknowledges buying entirely different stocks than Graham would. Graham’s notion of paying less than breakup value remains a useful pricing concept. Investors must do hard analytical work, however, to separate the nuggets from the worthless overburden.
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Practitioner's Digest
Practitioner’s Digest • Vol. 1, No. 3
The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.
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Article
Is Stock Return Predictability Spurious?
Two problems, spurious regression bias and naive data mining, conspire to mislead analysts about predictive models for stock returns. This article demonstrates the two problems, how they interact, and makes suggestions for what to do about it.
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Article
Enhanced Equity Indexers: Common Traits and Surprising Differences
This paper investigates the type of returns-based data a consultant or institutional investor would confront when analyzing an existing enhanced index manager or searching for a new one. The paper presents findings about different types of enhanced managers. Among them, and not surprisingly, the data suggests that all enhanced managers control tracking error by diversifying and by controlling factor exposures, in particular those relating to style (growth versus value) and company size. However, once those variables are controlled, the excess returns of these managers have remarkably low correlations, even among those following seemingly similar strategies.
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Article
Do Short Sellers Cause the Weekend Effect?
We provide a new explanation for the weekend effect. Our hypothesis is based on the contention that speculative short sellers are unwilling or less likely to hold their positions over long non-trading periods, typically the weekend. Therefore, they buy to cover on Fridays and reopen their positions on Mondays causing Friday returns to be larger than Monday returns. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks. We discuss trading implications of the finding.
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Article
Fund Managers May Cause Their Benchmarks to be Priced “Risks”
The presence of a positive intercept ("alpha") in a regression of an investment fund's excess returns on a broad market portfolio's excess return (as in the CAPM) and other "factor" portfolios' excess returns (e.g. the Fama and French factors) is frequently interpreted as evidence of superior fund performance. This paper theoretically and empirically supports the notion that the additional factors may proxy for benchmark portfolios that fund managers try to beat, rather than proxying for state variables of future risks that investors (in conventional theory) are supposed to care about.
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Case Study
A Prudent Man
“Case Studies” presents a case pertinent to contemporary issues and events in investment management. Insightful and provocative questions are posed at the end of each case to challenge the reader. Each case is an invitation to the critical thinking and pragmatic problem solving that are so fundamental to the practice of investment management.
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Survey & Crossover
Contagion
“Surveys& Crossovers” This section provides surveys of the literature in investment management or short papers exemplifying advances in finance that arise from the confluence with other fields. This section acknowledges current trends in technology, and the cross-disciplinary nature of the investment management business, while directing the reader to interesting and important recent work.
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Book Review
Asset Pricing
Credit Risk
“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.