This is a clear challenge to the efficient market hypothesis since Fortune’s picks are readily available public information. Portfolio consisting of the stocks identified annually by Fortune magazine as America’s most admired companies outperforms the S&P 500, whether the stocks are purchased on the publication date, or 5, 10, 15, or 20 trading days later. That is a significant outperformances Conclusions from the study The S&P 500 strategy is to be fully invested in the S&P 500 index over the entire 22 yearsĢ1 portfolios consisting of the Fortune’s 10 most admired stocks from 1983 to 2004 showed, on average, a 16.51% increase in value 250 trading days after the publication date, while the S&P 500 showed an average increase of only 10.27%. The Fortune portfolio is initially formed on 1983’s trading day each year thereafter, the portfolio is liquidated on that year’s trading day and the proceeds are reinvested in that year’s most admired companies. In our other calculations, the portfolio trading day is 5, 10, 15, or 20 market days (approximately 1 to 4 weeks) after the publication date. (Investors can easily implement this strategy because the magazine is actually sold a few days before the publication date given on the magazine cover.) In one set of calculations, the trading day for this investment is the publication date. Our Fortune strategy involves investing an equal dollar amount in each of the most admired stocks each year. The first one consisted of equal investments in the top 10 stocks declared as America’s most Admired company every year and the other portfolio invested directly in the S&P 500. The research involved creating two portfolios. Smith, A Great Company Can Be a Great Investment, Financial Analyst Journal, 62(4), (2006) Methodology Surprisingly, a portfolio of these stocks outperformed the market by a substantial and statistically significant margin, contradicting the efficient market hypothesis. We test this “mistake” by looking at the stock performance of the companies identified each year by Fortune magazine as America’s most admired companies. Ī classic investing mistake is to confuse a great company with a great investment, since a company’s well-known virtues are presumably already factored into the price of the company’s stock. This is precisely what two academicians J. Now what if betting on the great horse that everyone else also thinks is a great horse is also rewarding. Like Soros, Buffett too had scant regard for this efficient market hypothesis.Īll of us are in the lookout for multi-baggers and to find the next great stock idea to invest.īuffett’s top hire, Todd combs, when asked about what he thinks is the most important thing about investing put it very nicely as “finding the great horse that no one else thinks is a great horse”Ī great company can be a great investment “I did be a bum on the street with a tin cup if the markets were efficient” – Buffett This is what the modern portfolio theory wants us to believe. Since the “greatness” of a business is already well known, the same would have been built into the price. The theory goes that new pieces of information gets automatically reflected in the price as markets are efficient. That is what many of us who studied efficient market theory as part of college curriculum learnt. “I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them”.ĭoes a great business make a great investment?Īpparently No. Section A – Illumin8 More Admiration, More Profits
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