How You Interpret the Data Makes All the Difference
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In addition, Marcial's returns do not take into consideration the fact that investors were highly unlikely to have been able to take advantage of the 9% first day price rise. They also ignore trading costs (bid/offer spreads) and commissions. This is particularly important when you consider that nearly half of Marcial's picks were priced under $15, and about one third were priced below $10. Stocks with such low prices are typically very small-cap stocks. These small-cap stocks carry much greater trading costs than do large-caps. For example, the bid/offer spread (an estimate of trading costs) for the largest 10% of stocks is just 0.65%. However, for the smallest 10% of stocks it is almost seven times as great at 4.3%. And, then you have to add in commissions (buy and sell) as well.

Once you subtract all estimated trading costs, Marcial's supposedly impressive returns no longer look so hot. In fact, using any reasonable estimate of the costs of implementing a "Marcial" strategy would have produced returns that were substantially below an appropriate benchmark. One other thing to consider is that this analysis ignored the potential large tax implications of such an active stock picking strategy. Putnam's work points out how easily investors can be misled by misleading information.

Investors need to carefully examine all claims of superior performance to ensure that they are both comparing apples-to-apples and that trading costs (or estimated trading costs) are included in comparisons of returns. Remember that a strategy must be implementable to be of any value.

Larry Swedroe is the author of "The Only Guide To A Winning Investment Strategy You Will Ever Need." He is also the Director of Research for and a Principal of Buckingham Asset Management, Inc. in St. Louis, Missouri. However, his opinions and comments expressed within this column are his own, and may not accurately reflect those of Buckingham Asset Management.

8/03/00
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