Pomona College Research Shows Beating the Stock Market May Be Easier Than Investors Think
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 a Pomona College economics professor and one of his students.
Professor Gary Smith and Class of 2005 graduate Jeff Anderson 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.