The R.I.S.E. Forum

I'm back safe and sound (even if a bit sleep deprived) from the R.I.S.E. Forum in Dayton. It was a great experience for my students (and pretty good for me too).

The first night of the conference, we'd just checked in my student s and I were talking in the hallway. One of the conference big shots (he's a regular talking head on MSNBC on stock market matters walked by, and we struck up a conversation. He said he was meeting at a local tavern with some students that had been out to his company , and invited my students along. So, they ended up having a beer or two with him, and talked stocks for about two hours. The next day, they got to hear Chris Gardener (the book The Pursuit of Happiness was based on his story), and even got their a picture taken with him.

The next two days, we all saw a number of excellent sessions, made a lot of good friends and contacts, and even got some ideas for our Student Managed Fund.

I'd recommend the conference for anyone who's considering it.

More on The Accrual Anomaly

Here's another paper on "tradable" patterns in stock returns. The CXO Advisory Group recently put up a summary of the study titled "Repairing the Accruals Anomaly" by Hafzalla, Lundholm and Van Winkle. The paper examines the pattern that stock market performance of firms with low accruals (i.e. the difference between the firm's earnings and cash flows) is significantly greater than the performance of their higher accrual counterparts. It does a pretty good job of examining Sloan's "Accrual Anomaly" with a few tweaks:

• It corrects for the extent to which the firm is financially healthy, using Piotrowski's "financial health" indicator.
• It measures accruals in relation to earnings rather than to assets
  

Their findings are that the accrual anomaly does a better job of sorting out investment performance for financially healthy firms. Their results are pretty strong (note- the following is CXO's summary):

• A hedge strategy that is long (short) firms of high (low) financial health (ignoring accruals) generates an average size-adjusted annual return of 9.36% across the entire sample.
• After excluding firms with the lowest financial health scores, a hedge strategy that is long (short) the 10% of firms with the lowest (highest) traditional accruals generates an average size-adjusted annual return of 13.64%, with 7.98% coming from the long side
• Using the total sample, a hedge strategy that is long (short) low-accrual, high financial health (high-accrual, low financial health) firms produces an average size-adjusted annual return of 22.93%, with a 14.92% from the long side. (See the first chart below.)

Here's a pretty good grapic of size adjusted abnormal returns on the various portfolios. Note that financially healthy firms with low accruals earn a size-adjusted abnormal return of about 15% annually, while those in the "financially unhealthy/high accruals" group have negative size adjusted returns of about almost 10% a year.





Read the paper here.

It looks like my students in Unknown University's Student Managed Fund will have another indicator to look at next semester.

On The Road Again...

I'll be out of town for a few days (in Washington) meeting with some coauthors to work on a number of projects. They'll probably work me pretty hard, so blogging will likely be light until Saturday.

But it's not like I'm getting paid for this, so I don't feel too bad.

Now I have to suck up to (er, that is, er "meet") with the head of the alumni board and the VP of advancement (the university's fund raising area). We're trying to get more money out of them for our student managed investment fund. We're hoping that we can convince the alumni to let us "charge" a management fee that we can then use to fund some finance-related student activities (like scholarships for CFA study materials, sending a couple of student each year to the RISE Forum at the U. of Dayton, and so on).

update: The meeting went pretty well. Looks like our students might be getting some money. Woo Hoo!

Yes, I'm Still Alive

It's been a while since the last time I posted anything to the Blog. Don't worry - I'm still alive and kicking. I've just been a bit snowed under with end-of-semester madness. Just to give you a sense, here are a few things that have happened since the last post:

• A big chunk of the last couple of weeks went into getting our presentation together for the end-of semester presentation in the Student Managed Investment Fund. Every semester, they present their results to the Advisory Board. They had a lot to talk about this time around, since the fund has gone through a lot of changes since last semester. Over the last few years, the fund had drifted towards a "stock picker" style without firm standards for investment (one of the students had a good description for it - "momentum chasing"). This semester, we made a concerted effort to bring the fund's practices in line with traditional top-down fundamental analysis. So, they had a lot to talk about. They absolutely nailed the presentation - the Board said it was the best job they'd seen in many semesters' time. They made me proud - it's always fund to see your students shine in front of outsiders.
  
• My exams have been administered, but I still need to grade them. I have about an afternoon of work left on the stack of exams, and then another 5 hours or so to grade a couple dozen stock analysis reports (either for my investments class or for my student managed investment fund class - I assign them in both classes).
• I went to the Eastern Finance Association Meeting in New Orleans. Although it comes at an inconvenient time, it was still worth it. This is probably my 9th or 10th EFA since 1992, so I'm at the point where I know many, if not most, of the regulars (being a flaming extrovert certainly helps). In addition to eating a lot of good food (it was NOLA, after all), I saw a couple of good papers, presented one of my own, discussed another, and spent a couple of hours working with colleagues on a paper we started the year before. On that note...
• For the previously mentioned paper, I've recently been diving into a new data set with gigabytes and gigabytes of data (gee, I had a Carl Sagan moment there...). It's by far the larges data set I've ever worked with, and the data has a lot of quirks that I'll have to deal with before I can start with the hard-core torturing. But luckily, I like wrestling with messy data issues.
  
• On the home front, I just shelled out about a grand to get my lawn fixed - our house was brand new when we bought it last summer, and the lawn never really took hold (we moved in late July). So this spring I faced up to my limitations and decided to pay someone else to do it, at least to get it started.
• I also received rejections from two different journals in the last week. Getting rejections is nothing new, but it still stinks. After patching up the papers a bit from the bite marks left by the reviewers and editors we'll try to send out pretty quickly to other journals. Hopefully I'll have a productive summer so I can send out a couple more pieces for further rejections.
  

And finally, all is pretty good in the Unknown Household (except for the lawn, which is the embarrassment of the neighborhood). Unknown Son missed a couple of important years of learning how to be a lunatic boy due to his bout with cancer, so he's just getting around to learning how to ride a bike. Today he just got his first one.

Let the Kodak Moments begin.

Off At The R.I.S.E. Forum

I've been away from the Blog for the last few days for a couple of reasons. First, because I was getting a big burned out, and needed a few days off.

Second, and more important, I was at a conference in the teeming metropolis of Dayton Ohio at the 7th annual R.I.S.E (Redefining Investment Strategy Education) Forum. For those of you who aren't familiar with it, here's a description from last year's press release:

The University of Dayton will host the sixth annual R.I.S.E. (Redefining Investment Strategy Education) Forum from March 30 to April 1, 2006. R.I.S.E. is the first forum of its kind to bring students, faculty, and Wall Street together in an interactive learning environment to discuss a range of issues facing tomorrow’s leaders in the financial services industry. More than 1,200 participants, including undergraduate and graduate finance students and professors from universities around the world, will join professionals and internationally renowned industry leaders in what is the world's largest student investment conference.

Since this was my first time at R.I.S.E., I went solo (in other words, I didn't take any students from Unknown University). It burned up a couple of days at the end of the semester (when I couldn't really spare them), but it was well worth it. I heard some good sessions on estimating cash flows, value investing, and private equity. And there was a great session on Saturday where a number of faculty advisors and/or trading room managers from different schools shared their experiences.

Even more important than the sessions, however, was the chance to network. I had a number of good discussions with SMIF faculty advisors from other schools, and have quite a few ideas on how to improve our fund.

On Friday night, instead of going to the dinner at the U.S.A.F museum, I went instead to the "Oregon" district (only a few miles away from the hotel). It's an interesting and extremely funky place - everything from tattoo shops to espresso bars to a Christian Bookstore right next to a porn shop. I had a good meal of sushi and Thai food at Thai 9 and then sat at a table outside the neighboring coffee bar and watched the locals go by for about an hour (hey - I'm the type of persin who likes to watch people at airports).

Next year, I'll definitely bring some of Unknown University's students with me. All I have to do now is hit my Dean up for some $$ (or get some of the investment fund's alumni to pitch in). But I might not bring them to the Oregon district - there are some things I'd rather not know...

Do Industries Lead The Market?

The title of this post comes from an article of the same name by Harrison Hong, Walter Torous, and Rossen Valkanov in the February 2009 Journal of Financial Economics (one of the top two or three academic finance journals). Their answer is "yes". Here's the abstract (emphasis mine):

We investigate whether the returns of industry portfolios predict stock market movements. In the US, a significant number of industry returns, including retail, services, commercial real estate, metal, and petroleum, forecast the stock market by up to two months. Moreover, the propensity of an industry to predict the market is correlated with its propensity to forecast various indicators of economic activity. The eight largest non-US stock markets show remarkably similar patterns. These findings suggest that stock markets react with a delay to information contained in industry returns about their fundamentals and that information diffuses only gradually across markets.

It's a bit heavy on the math for a typical undergrad or non-quant-jock, but well worth discussing in an investments class. My take on the article (at least as far as using it in the classroom) is that it provides pretty interesting evidence that economic fundamentals matter, and that markets are forward looking. Yeah, I know - these aren't new findings. But since I'm teaching CFA, I've been talking a lot about "fundamentals" (it's a big emphasis in the program). So it's been on my mind.

Red Tuesday

Today was a good day to be teaching investments. My student managed investment fund class was a bit shell shocked at losing 3 1/2 % of the fund's value in one day (we meet on a MWF schedule, so there wasn't class on Tuesday). .And 100% of our 20+ positions in the fund ended in the red for the day (hence the title of this post). So, there was a lot of discussion about the various stories explaining the drop (Shanghai, bad economic news, and the ever-popular "Greenspan said we're due for a recession").

The biggest positive of this experience is that it has sharpened their focus on the "downside" of being in the market. If you're going to be in the market, you have to see a major correction at some point, and it's better to see it earlier than later (and it's even better if you can experience it with some else's money). We spent a lot of time discussing some positions we plan on exiting and whether or not to sell now, wait and see, or put in stop losses. Of course, I won't tell you what they decided.

But on the good side, the fund has clawed back almost 8/10 of a percent today. It's still not great, but it is an improvement over yesterday's results.

update: It was interesting teaching CFA last night - I got to talk with a couple of equity traders. One had been at it for about 7 years, and had a lot of relatively young guys in her group (almost all had started post 9-11). She enjoyed the panic they expressed since they'd never experience a correction like this. So it's not just my students.