Books of interest

• A Random Walk Down Wall Street
• A Non-Random Walk Down Wall Street
• What Works on Wall Street
• The New Finance: The Case Against Efficient Markets
• The Winner’s Curse: Paradoxes And Anomalies Of Economic Life

Selected Quotes on Anomalies

All the statistics boil down to this: Too many investors are trying to find the next Home Depot. Too few are trying to find the next Chrysler. There are at least three dozen academic studies showing the long-term superiority of value strategies.

Graham’s observations that investors pay too much for trendy, fashionable stocks and too little for companies that are out-of-favor. was on the money. why does this profitability discrepancy persist? Because emotion favors the premium-priced stocks. They are fashionable. They are hot. They make great cocktail party chatter. There is an impressive and growing body of evidence demonstrating that investors and speculators don’t necessarily learn from experience. Emotion overrides logic time after time .

Because of bid-ask spreads, transactions costs, and the price impact of trading, investors most likely will not earn abnormal returns from following a value strategy. We suggest that the increased marketing of style funds in the past two decades may have created an environment allowing funds to justify charging higher expenses. Higher fees and the price impact on trading smaller stocks appear to make the value premium unobtainable for the typical mutual fund investor. We propose that the value premium is simply beyond the reach of investors .

Fact is that most seasonal tendencies are only ‘statistically significant’ — meaning you can write a dissertation on the subject, but don’t try to make money on it. Institutions, unlike most of you, close their books at the end of the year and tally up their gains and losses so they can prepare their report cards. If a stock has been the subject of bad news and has done poorly, they may throw it out, even if it is now a cheap stock; they don’t want prospective investors to think they pick losers.

Laszlo Birinyi Jr. The window dressing anomaly Forbes. 12/20/93.

Elaborate tests of the correlation of successive prices, runs, and filter rules find some weak relationships, but they are not sufficient to generate trading profits after taking account of transactions costs .

Graham and Dodd’s Security Analysis . Fifth Edition. Sidney Cottle, Roger F. Murray, and Frank E. Block.

Many can be explained away. When transactions costs are taken into account, the fact that stock prices tend to over-react to news, falling back the day after good news and bouncing up the day after bad news, proves unexploitable: price reversals are always well within the bid-ask spread. Others, such as the small-firm effect, work for a few years and then fail for a few years. Others prove to be merely proxies for the reward for risk taking. Many have disappeared since (and because) attention has been drawn to them. One example is the partial disappearance of the illogical discount on closed-end funds in America (known in Britain as investment trusts), since Princeton University’s Burton Malkiel drew attention to it in his book A Random Walk Down Wall Street. The activities of traders exploiting an inefficiency cause it to disappear .

Frontiers of Finance Survey, The Economist 10/9/93.

The best time to buy is when blood is running in the streets .

Nathan M. Rothschild

Most so-called anomalies don’t seem anomalous to me at all. They seem like nuggets from a gold mine, found by one of the thousands of miners all over the world .

Fischer Black