A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

IT’S DOWN TO ONE

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Source: 
The Wall Street Journal
,
1/5/09.
Although the preceding discussion has focused on mutual
funds, it should not be assumed that the funds are simply the
worst of the whole lot of investment managers. In fact, the
mutual funds have had a somewhat better performance record

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than many other professional investors. The records of life
insurance companies, property and casualty insurance
companies, pension funds, foundations, state and local trust
funds, personal trusts administered by banks, and individual
discretionary accounts handled by investment advisers have
all been studied. No sizable differences in the investment
performance of common-stock portfolios exist among these
professional investors or between these groups and the
market as a whole. Exceptions are very rare. No scientific
evidence has yet been assembled to indicate that the
investment performance of professionally managed portfolios
as a group has been any better than that of a broad-based
index.
CAN ANY FUNDAMENTAL
SYSTEM PICK WINNERS?
Research has also been done on whether above-average
returns can be earned by using trading systems based on
press announcements of new fundamental information. The
answer seems to be a clear no. Systems have been devised in
which a news event such as the announcement of an

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unexpectedly large increase in earnings or a stock split triggers
a buy signal. But the evidence points mainly toward the
efficiency of the market in adjusting so rapidly to new
information that it is impossible to devise successful trading
strategies on the basis of such news announcements.
*
Research indicates that, on average, stock prices react well in
advance of unexpectedly good or unexpectedly bad earnings
reports. In other words, the market is usually sufficiently
efficient at anticipating published earnings announcements
that investment strategies involving purchases or sales of
stocks after the publication of those announcements do not
appear to offer any help to the general investor. Although it
is true that some studies have found that stock prices
sometimes underreact to earnings announcements, whatever
abnormalities exist do not occur consistently over time.
Similarly, no new information is obtained from
announcements of stock splits. Although companies splitting
their stocks have generally enjoyed rising stock prices in the
period before the announcement, the subsequent performance
is in line with that of the general market. These studies
support the old Wall Street maxim “A pie doesn’t grow
through its slicing.”

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A good deal of research has also been done on the
usefulness of dividend increases as a basis for selecting stocks
that will give above-average performance. The argument is
that an increase in a stock’s dividend is a signal by
management that it anticipates strong future earnings.
Dividend increases, in fact, are usually an accurate indicator
of increases in future earnings. There is also some tendency
for a strong price performance to follow the dividend
announcement. However, any rise in price resulting from the
dividend increase, even if not immediately reflected in the
price of stock, is reflected reasonably completely by the end
of the announcement month.