Expert strategies. A reliable source to beat the market? (eBook)

Seminar paper from the year 2014 in the subject Business economics - Investment and Finance, grade: 1,0, University of Cologne (Institut für Finanzierungslehre), course: Seminar Investment Myths, language: English, abstract: The main objective of this paper is the evaluation of the investment value of expert strategies in stock investment with regard to higher profits than the overall market. As a first step, Section 2 will briefly characterize the rationale of expert strategies and derive the main benefits financial experts can offer: more or better information.
In order to investigate whether high profits are a result of superior information and skills supplied by experts – or simply short-term anomalies – Section 3 is devoted to a detailed assess-ment of the theoretical foundations behind expert strategies. Here, the efficient market hypothesis delivers an important instrument to analyze this highly practical issue within an academic framework. In general, experts provide different types of information: public and private information. Thus, the different degrees of market efficiency elaborated in Section 3 require a decomposition of the widely-used term “expert” into two important agents on financial markets: financial analysts and legal insiders. This distinction follows the different types of information provided by experts and consequently the informational advantage investors may gain from implementing their advice. After the myth of expert strategies has been itemized into both its main agents and core theoretical aspects, Section 5 will give an overview of prior empirical work on the contribution of analysts and legal insiders to information efficiency and trading profits. Especially the latter point is crucial for investors and the main practical finding of this paper. Section 6 will take a closer look at the role of legal insiders in the German stock market by applying simple techniques derived from the prior section. The paper closes with a short conclusion in Section 7 that merges the theoretical implications and the most important practical findings of this paper to finally answer the question: Can expert strategies be a reliable source to beat the market? And, if so, how can investors participate?