Patrick Luo is a doctoral student at Harvard. He published a new study that supports the idea of just how hard it is for the average investor to achieve returns better than the market when trading individual stocks.
The paper is called: “Talking Your Book: Evidence from Stock Pitches at Investment Conferences”.
His research shows that well-known hedge fund managers – those private investment firms that often control billions in investment funds – often publicly pitch the stocks they currently own as great investments. Then, after the stocks rise quickly due to the publicity, the hedge funds will sell them in the months thereafter.
Luo estimated the stocks mentioned publicly rose at least one percent in the next two days after such a pitch by the hedge fund managers. Pitched stocks also tended to keep rising sometimes for months.
Many of these investment firms then sold the market thereafter. On average, a hedge fund manager who pitches a stock cuts its weighting in the portfolio within three months.
This behavior was common at large, well-known investment conferences. The conferences appear to be utilized by hedge fund managers to increase their returns through this method. However, most of the returns occurred before the announcement indicating the “leaking” of the hedge fund manager’s upcoming talk.
“Hedge funds take advantage of the publicity of these conferences and strategically release their book information to drive market demand,” Luo wrote in a new study. “Specifically, hedge funds sell pitched stocks after the conferences to take profit and create room for better investment opportunities.”
Patrick Luo states: “This suggests that the pitched stocks were their ‘best ideas’ but not likely any longer,” …. “Returns of pitched stocks diverged from market immediately after the pitches—long pitches spike up and short pitches spike down.”.
As they say in Hollywood, there is no such thing as bad publicity.
So ask yourself this question: can you – an investor without the resources that professionals have – outperform the market for an individual stock with this sort of dynamic occurring? Can you match the customized tax efficiencies of an active manager who knows your situation and is working on your behalf?
For a discussion of the passive versus active investing topic, I would point you toward the recent client letter from Howard Marks of Oaktree Capital. He does a great job of describing the issues and pluses and minuses of each approach. Here is the link: https://www.oaktreecapital.com/docs/default-source/memos/investing-without-people.pdf?referrer=email
