Mauboussin: Wisdom of Crowds
Via Emergic, here’s yet another (not frequent enough for me) essay by Michael Mauboussin of Legg Mason Capital Management.
- Even if you determine a collective is the best means to solve a problem, certain conditions must prevail for the crowd to be smart. These include diversity, aggregation, and incentives.
- To begin, the wisdom of crowds appears to be a viable and robust way to explain market behavior. At high level, market efficiency prevails when the wisdom of crowds conditions are in place.
- One potentially fruitful line of research links the dispersion of analyst forecasts (a proxy for differences of opinion) with subsequent stock returns. The research shows stocks with greater dispersion have lower subsequent returns because only the most optimistic investors, those who by definition place a high value on the company, trade the stock, and more pessimistic investors do not trade.
More on this topic
(What's this?)
Buybacks Can Reduce EPS and Still Add Value To Firm Shareholders
(Disciplined Approach to Investing, 4/2/07)
Thursday Tidbits
(Random Roger's Big Picture, 12/4/08)
Wall Street Journal: The Rise and Fall of Legg Mason's Bill Miller
(Fund my Mutual Fund, 12/12/08)
Boone Pickens Almost Entirely in Cash; Fidelity Job Cuts; Legg Mason Stock Craters
(Fund my Mutual Fund, 10/28/08)
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