Money Matters

Finance Professors Don't Practice What They Preach

A Central Michigan University professor who set out to discover whether or not finance professors practice what they preach found that they often do not and that they actually have less investing experience than one might expect.

CMU assistant professor of finance Colby Wright, along with James S. Doran and Dave Peterson of Florida State University, surveyed all finance professors at accredited, four-year universities and colleges in the U.S. to assess what they do with their own money, find out what drives their decisions and discover how much real-world investing experience they have.

"The idea was that finance professors have a very unique dual position as both researchers and active participants - they study financial markets, but they also invest in the markets," said Wright. "Considering how knowledgeable they should be on the subject and considering they are entrusted to teach others how to invest, we thought it would be interesting to find out what they do with their own money."

Their study discovered that approximately two-thirds of finance professors are "passive investors" and do not try to beat the market. This is not because of limited time and resources, however, since only seven percent of respondents believe that they could beat the market if they had the time. This suggests that the 67 percent who are passively investing do so because they cannot beat the market. The study also found that finance professors have the bulk of their wealth in general mutual funds, with a fair amount also in individual stocks.

The study also concluded that finance professors have less investing experience than might be expected. The median professor has purchased an individual stock fewer than 20 times in his or her life, more than 14 percent have never purchased an individual stock, roughly 70 percent have no experience buying or writing options, and more than 80 percent have no experience with futures. Also, approximately 60 percent have never purchased an Exchange Traded Fund, an increasingly popular investment asset.

Wright, Doran and Peterson found that when finance investors are actively trading to beat the market, what matters the most are price-to-earnings ratio, market cap, and momentum-related information, such as a stock's return over the past six or 12 months and the stock's 52-week high and low, while some of the most ubiquitous asset-pricing models and valuation techniques were ranked the lowest. Specifically, dividend-based valuation models and some of the traditional asset-pricing models were the least important to finance professors.

"This suggests that finance professors who are actively investing to try to beat the market are not using complex asset pricing models or valuation techniques," said Wright. "Nor are they relying on the risk factors that comprise the models. They are largely doing simple screening on fundamentals and firm characteristics such as price-to-earnings ratio, market cap and past performance over the most recent six or 12 months."

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