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Sitter och förbereder ett kommande avsnitt. Roade mig med studien: “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns” av Andrea Frazzini och Owen Lamont från 2005. Temat är det här som så många kommenterar till mig på Twitter, här i forumet:

  • Jag köper det som har gått bra
  • Sedan kommer jag kliva ut innan det börjar gå dåligt

Här är en studie som har tittat på just det här. Egentligen inget nytt, mest bara en referens för att ha en bas att stå på.

Utvalda citat

… retail investors direct their money to funds which invest in stocks that have low future returns. To achieve high returns, it is best to do the opposite of these investors. We calculate that mutual fund investors experience total returns that are significantly lower due to their reallocations. Therefore, mutual fund investors are dumb in the sense that their reallocations reduce their wealth on average. We call this predictability the “dumb money” effect.

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Second, the dumb money effect is related to the value effect. Money flows into mutual funds that own growth stocks, and flows out of mutual funds that own value stocks. The value effect explains some, but not all, of the dumb money effect. The fact that flows go into growth stocks poses a challenge to risk-based theories of the value effect, which would need to explain why one class of investors (individuals) is engaged in a complex dynamic trading strategy of selling “high risk” value stocks and buying “low risk” growth stocks.

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Third, demand by individuals and supply from firms are correlated. When individuals indirectly buy more stock of a specific company (via mutual fund inflows), we also observe that company increasing the number of shares outstanding (for example, through seasoned equity offerings, stock-financed mergers, and other issuance mechanisms). This pattern is consistent with the interpretation that individual investors are dumb, and smart firms are opportunistically exploiting their demand for shares.

samt, dagens tröst för fondförvaltare

So if we observe the mutual fund sector as a whole holding technology stocks, that does not imply that mutual managers as a whole believe tech stocks will outperform. It is hard for a fund manager to be smarter than his clients.

samt en intressant kommentar

Looking at the difference between high flow and low flow stocks, it is striking that for every horizon but three months, high flows today predict low future stock returns. This relation is statistically significant at the three and five year horizon.

effekten är inte liten heller

This dumb money effect is sizeable: looking at three-year, equal weight results, the difference between high flow and low flow stocks is 61 basis points per month or approximately 8 percent per year. Remarkably, the dumb money effect is slightly larger using value weighting instead of equal weighting. This result stands in contrast to many other patterns in stock returns, which tend to be concentrated in small cap stocks.

Deras slutsats

Slutsatsen från studiens författare. Mina fetmarkeringar.

In this paper, we have shown that individual investors have a striking ability to do the wrong thing. They send their money to mutual funds which own stocks that do poorly over the subsequent years. Individual investors are dumb money, and one can use their mutual fund reallocation decisions to predict future stock returns.

The dumb money effect is robust to a variety of different control variables, is not entirely due to one particular time period (although concentrated around the year 2000), and is implementable using real-time information. By doing the opposite of individuals, one can construct a portfolio with high returns. Individuals hurt themselves by their decisions, and we calculate that aggregate mutual fund investor could raise his Sharpe ratio by 9% simply by refraining from destructive behavior.

These facts pose a challenge to rational theories of fund flows. Of course, rational theories of mutual fund investor behavior already face many formidable challenges, such as explaining why investors consistently invest in active managers when lower cost, better performing index funds are available.

We have found mixed evidence on a smart money effect of short-term flows positively
predicting short-term returns. One interpretation of this effect is that there is some short-term
manager skill which is detected by investors.

Another hypothesis, explored by Wermers (2004) and Coval and Stafford (2005), is that mutual fund inflows actually push prices higher. Another possibility, explored by Sapp and Tiwari (2004) is that by chasing past returns, investors are stumbling into a valuable momentum strategy. Whatever the explanation, it is clear that the higher returns earned at the short horizon are not effectively captured by individual investors.

Of course, it could be that some subset of individuals benefit from trading, but looking at the aggregate holdings of mutual funds by all individuals, we show that individuals as a whole are
hurt in the long run by their reallocations.

Although the dumb money effect is statistically distinct from the value/reversal effect, it is clear these two effects are highly related. It is remarkable that one is able to recover many features of the value effect without actually looking at prices or returns for individual stocks. In our sample, the value effect is generally bigger than the dumb money effect among small cap stocks, but the dumb money effect looks at least as big among large cap stocks.

The evidence on issuers and flows presents a somewhat nonstandard portrait of capital markets. Past papers have looked at institutions vs. individuals, and tried to test if institutions take advantage of individuals. Here, the story is different. Individuals do trade poorly, but these trades are executed through their dynamic allocation across mutual funds, that is, via financial institutions.

As far as we can tell, it is not financial institutions that exploit the individuals, but rather the non-financial institutions that issue stock and repurchase stock. Stocks go in and out of favor with individual investors, and firms exploit this sentiment by trading in the opposite direction of individuals, selling stock when individuals want to buy it.

We find some modest evidence that mutual fund managers have stock picking skill, but that any skill is swamped by other effects including the actions of retail investors in switching their money across funds. In our data, financial institutions seem more like passive intermediaries who facilitate trade between the dumb money, individuals, and the smart money, firms.

It is clear that any satisfactory theory of the value effect will need to explain three facts.

  • First, value stocks have higher average returns than growth stocks.
  • Second, using various issuance mechanisms, the corporate sector tends to sell growth stocks and buy value stocks.
  • Third, individuals, using mutual funds, tend to buy growth stocks and sell value stocks.

One coherent explanation of these three facts is that individual investor sentiment causes some stocks to be misvalued relative to other stocks, and that firms exploit this mispricing.

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