Investing: You Can Learn To Do It Yourself If You Know Where To Look
Wednesday, July 4th, 2007The investor who wishes to make a serious effort to manage his/her own financial investments faces a formidable task. Virtually all professional investment managers follow a continual process that involves collecting relevant data and then analyzing it to produce decisions on how to act. Both the data used and the methods of making decisions vary widely, but it is not our purpose here to describe the details of either area. Rather, this article concentrates on helping the reader locate free sources of information on investment decision-making processes that she might be able to employ in managing her own investments.
We divide the sources into three areas to be discussed in turn, but of course there are other sources.
ACADEMIC SOURCES
The management of financial investments for the benefit of others is a big business, to say the least. Each year investment professionals in the US collect hundreds of billions of dollars from their clients in fees, commissions, expenses etc. It is therefore not surprising that universities have devoted a lot of resources to business schools and departments of economics where faculty and students spend their time trying to understand how financial markets work, and more particularly how to profitably invest in these markets. Many of the students proceed to high-paying jobs in the investment industry, so that the universities can charge the students high fees. Many of the faculty gain by acting as consultants to financial institutions, and some of them are involved as principals of investment management firms. [see this article.]
It seems to be a situation where everybody concerned should be happy, except perhaps the clients.
The typical individual investor is an outsider to the above structure, but nevertheless there are opportunities for him to gain some benefit from the work that is produced. To an extent, the academic world follows the dictum of “publish or perish”. An academic gains prestige, salary, etc. on the basis of the length (and to a lesser extent the perceived quality) of her publication list. In every academic discipline there are journals that publish accounts of the research performed by people in the field. The shelves of university libraries buckle with the weight of years of volumes of each journal. For example, in 2006, the Journal of Finance, a leading publication in Financial Economics, published over 2500 pages.
In recent years the journals in many fields have been made available in electronic form, but only to those people affiliated with institutions that pay a fee to the body that publishes the journal. For the individual investor who is not lucky enough to have a connection to a university that includes electronic journal access, it may still be possible to obtain copies of some articles from the web sites of the authors, or perhaps by a general search of the Internet. Sometimes a friend might send the investor a copy of a specific article. Of course, for those near enough to travel to a university, it may be possible to obtain hard copies of articles from the library, even if the investor has no affiliation with the institution.
The first few interesting articles that an investor finds can be the start of an endless chain of others. Each article contains a list of references to other articles on related topics. In addition, for those with access to the ISI Web of Knowledge, it is possible to find a list of later articles that refer to a specific earlier paper. For those without this access, a standard search engine can partially take its place.
Some of many web sites of academics are:
WORKING PAPERS
It may take several years from submission of the article to the journal to the time when it appears in the journal. Many academics produce drafts of articles, called working papers in the social sciences, that are freely available on their web sites long before the final version appears in print. With experience an investor may learn the names of academics whose articles are of interest, so that he can look at their web sites from time to time and keep up to date with recent developments. This process has been facilitated by the establishment of data banks of working papers, where authors may have their works listed and available for search and download, all at no cost. Note that these data banks do not require that the paper be evaluated by an expert in the field, as is the case with journals. There may be problems with the quality of some working papers, but the journals’ peer review system also has difficulties.
An important data bank in the social sciences is the Social Science Research Network (SSRN) - the section on financial economics will be the one for the investor to look for. The paper with the most downloads is “Market Efficiency, Long-Term Returns, and Behavioral Finance,” by Eugene Fama of the University of Chicago - Graduate School of Business. It was posted to the database on April 30, 1997, and it was also published in the Journal of Financial Economics in 1998. There have been over 60,000 downloads of this paper from SSRN, a staggering figure. Currently the two most popular recent working papers are
“We Don’t Quite Know What We are Talking About When We Talk About Volatility,” by Daniel G. Goldstein, Nassim Nicholas Taleb, London Business School, University of Massachusetts at Amherst,
“Where do Alphas Come From?: A New Measure of the Value of Active Investment Management”, by Andrew W. Lo, Massachusetts Institute of Technology (MIT) - Sloan School of Management,
Another working paper data bank is RePEc (Research Papers in Economics).
INVESTMENT PROFESSIONALS
Professionals such as portfolio managers and consultants probably have less incentive to disclose their ideas to the public, but some professionals have web sites containing interesting information. A small selection is
AlphaSimplex Group Founded by Lo and others
Arrowstreet Capital Founded by Campbell and others
Barra Leading supplier of risk management software - 300 articles available
Dimensional Fund Advisors Founded by Fama and others
Haugen Custom Financial Systems
Northfield Information Services
COMMENTSInclusion of a site in the above lists does not imply a guarantee that everything on the site is correct. In particular I and others have reservations about Fama’s ideas on the Efficient Market Hypothesis, and the Fama/French three-factor mode, the basis for DFA’s approach, has been criticized by Daniel.
The topics covered by the sites listed may have a bias towards the quantitative approach. A reader interested in other topics could look through the areas of expertise of faculty at institutions such as those appearing in the academic websites, to find something more to his taste.
For the novice investor, or the newly initiated to the field of investment, there exists numerous “how-to” books and web sites dedicated to informing the new investor and assisting him in understanding the arcane language of the investment profession and financial market practitioner. The InvestingMinds’ “Books” section contains titles of books that can help familiarize the uninformed or novice investor to the ways of the financial markets, Wall Street and investing. The “Financial Encyclopedia” can help with finding the meaning of financial concepts and investment terminology.
The concepts and jargon in academic articles may be unfamiliar to some individual investors. The serious investor might think it worthwhile to spend some time educating herself with the aim of eventually understanding enough to make value judgments of the material. It is wise to question everything you read in connection with investing. A knowledge of the relevant mathematics is valuable. I am dubious about applications of probability theory contained in many articles, implicitly or explicitly, and some understanding of this tricky subject would be helpful.
From experience I know that self-education about investing is possible, and I encourage others to learn as much as they can. These days the Internet makes it much easier to learn about almost any topic.
