Comments on: How Do Finance Professors Invest?

By: thomas

thomas — Wed, 13 Feb 2008 06:18:15 +0000

do as I say not as I do!

By: RacerX

RacerX — Sun, 03 Feb 2008 00:20:33 +0000

To be fair, the old joke is that if you are very good investing in single pick Commodities ,you can…lose your money much slower then the average investor!

By: Early Retirement Extreme

Early Retirement Extreme — Sat, 02 Feb 2008 07:44:51 +0000

“Diversification is the key to holding down your risk and maximizing your returns.” – could be misunderstood. Diversification minimizes risks (uncertainty), but it does not change returns. Modern (Markowitz) portfolio theory is eminently academic, so I would actually expect all of them to follow it. Note that there are several versions of the efficient market hypothesis. These guys probably believe in the weak form which popularly speaking assumes that the market is composed of clever people as well as stupid people and that the stupid people sometimes dominate the price (like buying houses they can’t afford of dot.com stock at P/E’s in the 60s .. ).

Note the word “hypothesis”. In order to get anywhere in a soft science like economics one has to make assumptions. The idea of instantly correctly priced securities is a big assumption but once you make it, the math becomes solvable and presto, we can make a precise theory. However, just because a theory is precise does not mean that it is accurate.

I rant I rant .. but I completely agree with your last sentence.

By: Mrs. Micah

Mrs. Micah — Sat, 02 Feb 2008 00:35:08 +0000

I’m with Dan. I bet they know how hard it would be to really time the market, analyze stocks, all that. And the low odds of doing it really well.

Plus they probably spend so much time teaching, grading papers, etc. My husband doesn’t even teach a full course load…and he wouldn’t have time to really keep on top of the market if he wanted to.

By: Kirk

Kirk — Fri, 01 Feb 2008 22:59:42 +0000

I think the 25% who don’t utilize index funds fall into the first trap of behavioral finance: overconfidence. Those investors who attempt to beat the markets all believe they are smarter than other investors. And, I imagine these folks suffer from overconfidence even more than most market timers. The professors have advanced degrees and teach business so they must really think they have an advantage.

Of course, academic research shows they don’t.

By: Dan

Dan — Fri, 01 Feb 2008 22:24:56 +0000

I think they invest in index funds because they know better. I learned all about portfolio theory and buying stocks, bonds, commodities, and other investments to diversify and enhance returns. It’s one thing when it’s other people’s money, but quite a different approach to attempt at home. The professors know that they could spend a lot of time creating a portfolio that is more likely to underperform the index with similar levels of risk.

By: Peter Harrington

Peter Harrington — Fri, 01 Feb 2008 21:42:44 +0000

I’m kind of surprised that so many invest in index funds. But they probably spend their whole day teaching about stock analysis, so to go home and look over stocks would probably be the last thing they want to do.