Value Investors Read This! Finding the Best Ideas in a Portfolio Pays Off

Found this via Abnormal Returns & Mebane Faber

The most important conclusions are!

1. Stock Market is not efficiently priced

2. Investors would benefit if manager held concentrated portfolios.

hmmmm I wonder why Bruce Berkowitz & Buffett do so well?

Click Here To Read The Paper On Best Ideas, Concentrated Portfolios, and Inefficient Markets

Abstract:

We examine the performance of stocks that represent managers’ “Best Ideas.” We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers’ portfolios, by approximately one to four percent per quarter depending on the benchmark employed. The results for managers’ other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance. This leads us to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts. Second, consistent with the view of Berk and Green (2004), the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.

Click Here To Read The Paper On Best Ideas, Concentrated Portfolios, and Inefficient Markets