Academics and ‘Independent’ Investment Research

I saw a Wall Street Journal article and immediately thought of the number of presentations I have watched over the years from academics.

I have seen at least two presentations from professors talking about the benefits of owning REITs.  One, a professor at Emory University, was credible.  The other, from the University of Denver, was not.  The U of D professor lost me when he suggested that he owns over 50% of his investments in non-traded real estate investment trusts and you could, too.  I wonder how that is working out for him and if liquidity is a challenge with this type of commitment?

The Emory professor was much more credible because he talked about the market but really didn’t suggest any investments.

Annuity companies have hired guns, too. I have seen a professor from NC State talk about the benefits of annuities. I think he is an attorney in the Raleigh area. He has a number of papers which support his findings that annuities are “okay”.

I think the biggest player in the “academic investment” propaganda has to be the mutual fund family founded by two academics. One is an University of Chicago professor and one teaches at Dartmouth. They are impressive and have built a wonderful business model around their academic stature and bucking the traditional system.

The challenge with any of these people is whether their findings pass the smell test.  I have to admit, many times it is difficult.  One of the questions every advisor must ask is whether the findings can be objectively replicated.

I am not talking about weak research that you may take and wishfully replicate.  I am talking about, for example, building your own model and trying to replicate the findings of the study being reported.

Recently, I watched a skilled dissection of ideas that one mutual fund company advertises. One idea is that small companies offer an additional opportunity for returns in a portfolio. In addition, if the portfolio is skewed toward the value side, a portfolio can produce additional returns and reduce the risk of the total portfolio. I have to admit, the academic works that support these original findings seem impressive.

So, what did I find out? The study we reviewed showed that the objective findings could not be replicated to any significant advantage. To say this more clearly, “The party replicating the hypothesis is willing to adopt the reported findings if they could replicate the significance of the claims. They could not.” It was an objective piece. I saw the process, and I saw the results. Could I replicate the findings? Sure.

As I run my practice, I have to be willing to accept better truths as better knowledge becomes available. I also want to be flexible on my client’s behalf. What I do not wish to do is add additional risk that adds more uncertainty to their lives.

Advisors need to be objective when working with information. Even if that information comes from dream sources.

http://online.wsj.com/article/SB10001424052748704023404575430061751135400.html?mod=WSJ_hpp_sections_personalfinance&goback=.gde_2370938_member_27353593.gmp_2370938.gde_2370938_member_27353593

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About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
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