Beware of Finance Studies on How to Beat the Stock Market

You probably need a subscription to Barron’s to read this. It’s a good one. It’s a summary of an academic study of academic studies on ways to beat the markets. The results are disturbing. The authors concluded that about half the studies simply are false. I’ve seen similar (and worse) assessments of the published literature in other fields. There’s simply no substitute for doing your own research and being able to evaluate others’ research instead of simply accepting their conclusions. I discuss in detail these data mining techniques in my book, Invest Like a Fox, Not Like a Hedgehog. Here’s a link to the full paper and to the lead researcher’s home page and to his blog post on the article.

Duke finance professor Campbell Harvey, one of three authors of a recent study that reviews more than 300 academic papers claiming to predict or explain stock-market perturbations, notes that half “are likely false.”

Academics, he adds, are too casual suggesting that investment strategies will consistently produce high returns. Just because a coin lands on tails nine out of 10 times doesn’t mean there’s a 90% chance it will do so on the next flip. “By random chance, some of those strategies look good,” he says.