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2017-05-18

  • batbeer2 commented on Rupert Hargreaves's article 05-18 13:03
    Is Big Oil the New Tobacco?
    Whether you like the sector or loathe it, you cannot argue with tobacco’s returns over the years. Tobacco stocks have produced some of the market's...
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    batbeer2 05-18 14:03
    • Thanks for an interesting link.

      I think your article is a very good summary of that long article. 

      From the first paragraph of that article:

      >> Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. 

      1) No, higher expected returns are not consistent with the stock being neglected by certain investors. 

      Yes, they try to (and perhaps do) prove sin stocks outperform. Also, they could have observed that the same group of stocks is neglected by certain groups of investors. This of course does not support the conclusion that the one causes the other. We could debate the matter but the burden is on them to provide evidence for their conclusion.

      What's worse, if you really wanted to test the idea that stocks that are avoided by pension funds outperform the general market, you could very simply measure the relative performance of those two groups of stocks to (dis)prove the idea. They did not do that. 

      Occam's razor applies and their conclusion is most likely untrue.

      2) If a stock is neglected and remains neglected it cannot be logically expected to outperform the general market. In terms of expectations, you would have to adress the issue of changing expectations. For some reason they haven't done that.

      Not to mention the fact that there are very simple and obvious mistakes in many of the formulas presented in the article.

      Thanks for sharing though. To me this is an example of how a lot of garbage cloaked in scientific terms and embossed with the names of reputable universities is floating around on the interweb. As long as that is the case, investors who ignore the crowd and think for themselves will be able to generate satisfactory returns.

      Good.

       

2012-04-22

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