A researcher at Central Michigan University surveyed 600 finance professors at major universities to determine their investment philosophies, practices, and the differerences between the two. You would think that those involved in higher education, teaching about market analysis, options and futures, and discounted cash flow analysis, would use these techniques when handling their own investments.
Apparently, most don’t.
About two-thirds of the professors, in fact, have the bulk of their assets in index funds, the low-cost baskets that essentially own the entire market. These academics more or less practice the basic lesson of modern portfolio theory: Diversification is the key to holding down your risk and maximizing your returns. That leaves a third who have gone astray, however.
So what about the remaining third? Surely these professors analyze the details of every stock they own and will know before buying the relevant information to determine the company’s chance of increasing its value. Again, this group of professors ignores their own advice as well, preferring to make purchasing decisions on recent performance. That is, they chase the hot stocks, too.
Of the portion of professors who believe in the “efficient market hypothesis,” which says that a stock’s price already takes all information into account, about 25% still believe they can beat the market by timing its fluctuations. They believe that the market cannot be timed — unless by them.
I don’t expect all professors to follow their own advice at all times. After all, they’re training their students to be finance professionals, fund managers, and analysts. In many cases, the professors are not finance professionals, they are professors. They’re not paid for their trading skills, they’re employed for their teaching skills.
What Really Matters When Buying and Selling Stocks? [James Doran and Colbrin Wright]
Don’t try to invest like the pros [Money Magazine]
Published or updated February 1, 2008.