Evaluating the Performance Claims of Investment Approaches

Claims about the performance of different stock investment theories are constantly being thrown about. Sometimes it is in the promotion of an investment letter or mutual fund, sometimes in a research summary of a variety of approaches.

AAII frequently summarizes the leading investment theories, and in Computerized Investing and Stock Investor Pro we provide formulas for different approaches and sample results over various time periods. We track and present the results of different screens twice a year in the AAII Journal [see the AAII Stock Screens area].

While this research can be of value, it is also important to realize its limitations so that you can place the results in the proper perspective.

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As an investor, what you really want to know is how a specific investment approach is going to perform in the context of your own portfolio in the future. Obviously, this information is not going to be available. But you can look at performance research and see if it provides any insight into how the strategy might perform in the future.

How can you tell if the research is truly insightful?

There are a number of factors that will influence the accuracy of historical research in estimating the future. You should carefully examine each one when reviewing claims of investment performance. Is there a rational underlying theory?

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Discussion

I agree with it vary much.

posted 6 months ago by John Doroschak from Minnesota

May 2002 Issue

Mutual Funds
Fund Investors' Biggest Mistakes and How You Can Avoid Them
Fund investors are not immune to mistakes, and fund managers can compound mistakes made by fund owners. One of the biggest mistakes is overconfidence, and the stock market is highly effective at deflating overblown egos.

Stocks
Evaluating the Performance Claims of Investment Approaches
While all honest research helps to shed light on successful approaches, there are weaknesses in research methods that you need to take into account. In some cases, flawed research may be used to intentionally lead you astray.

Portfolio Strategies
Liquidating Retirement Assets in a Tax-Efficient Manner
When you enter retirement, you retire from work, not from decision-making. For example, which assets should you withdraw first--taxable or tax-deferred? Decision rules for a typical retiree to keep tax liabilities to a minimum.

A Matter of Opinion
Evaluating the Research on Historical Performance
While all honest research helps to shed light on successful approaches, there are weaknesses in research methods that you need to take into account. In some cases, flawed research may be used to intentionally lead you astray.

Technical Analysis
When Nothing Says Something: Understanding Price Gaps
The size of a gap in trading can provide an indication as to future price activity. The wider the gap, the less apt prices are to follow through in the direction of the gap.

Stock Screens
Analyzing a Stock as a Business: The Buffett Approach to Screening
Warren Buffett's strategy is easy to understand, but its successful implementation requires a considerable amount of time, effort, and judgment. You need to thoroughly analyze the business and quality of management.

Portfolio Manager Interview
An Interview With Clifford A. Gladson, Portfolio Manager, USAA Tax-Exempt Bond
A look inside funds that use a steady, diversified approach to investing in the municipal bond market.

Insurance Products
Does It Make Sense to Sell Your Life Insurance Policy?
Policy sellers beware: Life-settlement firms are pursuing their own financial interests, and have extensive pricing expertise to do so--an advantage that individual policyholders can't match when evaluating a possible sale.

Evaluating the Performance Claims of Investment Approaches

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May 2002 Issue