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Pomona College Magazine is published three times a year by Pomona College
550 N. College Ave, Claremont, CA 91711
Online Editor: Mark Kendall
For editorial matters:
Editor: Mark Wood
Phone: (909) 621-8158
Fax: (909) 621-8203
PCM Editorial Guidelines
Contact Alumni Records for changes of address, class notes, or notice
of births or deaths.
Phone: (909) 621-8635
Fax: (909) 621-8535
Email: alumni@pomona.edu
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Economics / Gary Smith
Wall Street Wisdom
Beating the stock market may be easier than investors think—easy as
following a popular magazine’s most-admired companies list, according to
new research from Fletcher Jones Professor of Economics Gary Smith and
Jeff Anderson ’05.
The duo set out to test an enduring piece of Wall Street conventional
wisdom: that great companies often don’t make for great investments. The
idea is that if a company already has an excellent reputation, that
knowledge is already built into its stock price, limiting the potential
for big gains. Known as the “efficient markets hypothesis,” this notion
has gained wide acceptance over the years.
 Because it is so widely disseminated and publicized, Smith and Anderson
turned to Fortune Magazine’s annual list of “America’s Most
Admired Companies” to test the hypothesis, comparing the stock market
performance of the annual Top 10 most-admired companies to the
performance of the broader Standard & Poor’s 500 index. Their research
covered the period from the list’s inception in 1983 to 2004, a span of
21 years, and is published in the July/August 2006 issue of Financial
Analysts Journal. The results: the most-admired companies
dramatically outperformed the wider market, yielding annual returns of
17.7 percent vs. 13 percent for the S&P 500.
“It was a big surprise,” says Smith of the results, adding that he
“re-checked and re-checked” the data as a result.
Smith and Anderson’s research has the most-admired companies
outperforming the S&P whether the investor purchased the stocks on the
day of the magazine’s publication, or 5, 10 or 20 trading days later.
Their scenario has investors purchasing equal proportions of the Top 10
stocks, then, when the next year’s list is published, selling them to
invest in the new Top 10.
The researchers report that the difference in returns can’t be
attributed to the performance of a few standout companies. Over the 21
years, 214 different company stocks would have been purchased as part of
the Fortune portfolio.
Smith isn’t sure why the efficient markets hypothesis failed the test,
but he suspects the highly-touted companies benefit more from
“scuttlebutt”—the positive chatter about their performance—than
numbers-oriented Wall Street analysts realize.
The research started when Anderson delved into the topic, at Smith’s
suggestion, for a paper as part of a senior-year economics seminar.
Anderson says the research experience was “a great way to cap off my
four years” at Pomona. Today, Anderson, an economics major from Mercer
Island, Wash., is a portfolio administrator at Mellon Financial in
Glendale, Calif.
-- Mark Kendall |
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