David McLean

Academics: Academia destroys stock picking strategies

November 2, 2012: 11:57 AM ET

If you want a stock trading strategy to work, keep it to yourself.

FORTUNE -- Academics are very good at identifying characteristics that can predict stock performance. They also are good at publicizing their findings. And therein lies the problem.

Professors David McLean (MIT) and Jeffrey Pontiff (Boston College) set out to learn what happens after academic papers on new trading strategies are published, and found that the strategies quickly lose efficacy.

"Our results suggest that when academics publish a paper about a new strategy, investors learn from the paper and begin to trade on that strategy," McLean explains. "This trading impacts prices, bringing them more in line with fundamental values. This in turn makes the strategy less profitable, so it appears that academic research destroys stock return predictability."

The researchers analyzed 82 different stock-picking characteristics contained in 68 peer-reviewed studies, and found that characteristics "decay" by approximately 35% post-publication. The decay is particularly severe among strategies that involve trading stocks that are large, liquid and have high-dividend yields.

Go here to read their entire paper.

All of this makes inherent sense. After all, successful stock-picking is largely about realizing something that the other guy doesn't (thus the reason he sells you shares). What it does question, however, is the value of academics spending their time trying to identify such strategies.   If the strategy becomes largely irrelevant the moment it gets published, then it's almost like they're literally creating history...

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