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Loyal Reader Jay

While I do believe there is something to both the Most Admired Fund and the Least Admired Fund, before investing, I'd like to see some additional analysis on two effects...

1) Signaling Effect - a company that makes the Most Admired list automatically gets a bump in stock price immediately when the news breaks. As markets are efficient, this added piece of positive news will be factored into the stock price. Similarly, the news of being 'Least Admired' probably results in an immediate ding. Another good example of such a signaling effect on the street solely based on others opinion is the Raymond James Top Picks - this 'fund' of 10 most likely to outperform stocks often sees a 5% uptick after the announcement. Therefore, creating a fund to buy it becomes difficult as, due to market efficiency, it is difficult for any investor to reap the reward of this information.

2) Market Timing - closely tied to #1 is the timing of the gain/loss/upticks, etc. A more robust analysis would look at when the premium to the S&P actually occurs. On the positive side (Most Admired), the uptick most likely occurs immediately upon announcement, again, eating up the possibility of small investors reaping rewards. On the other hand, the 'Least Admired', if the Challenge Dividend really holds, will offer the best opportunity for investment wins....the market will punish but the challenge will incent over the longer term. If these stocks actually see a hit after the announcement of their presence on the Least Admired list, then the win could be there for the investor...

Bob G

Great perspective, Jay. I believe you are absolutely correct - in the short term. If we're looking at a one year return, both signaling and marketing timing or "noise" would have an impact.

But we're talking about a 23-year study here. The bottom line is that if you bought these stocks after publication and sold them after a year (or kept them if they stayed most admired), you beat the S&P. But, the study shows, you DO get a lot of variability. And, as any good adviser says "past performance is no indicator of future gains."

As for the Raymond James Best Picks, I took a hit on those myself - which is why I started thinking about other ways to use "the wisdom of crowds" to pick stocks instead of trusting some MBAs.

I think what's great about the Most Admired strategy is that it is completely public and open. Most investors would say that the news of making Most Admired does not really impact the price BECAUSE it is pretty basic/open info. But a quasi-secretive Raymond James "best picks list" feels more like new info to investors, so the price jumps up.

Finally, I actually created a theoretical fund of the top 25 Most Admired from this year. If you set the price at March 6th close, the last trading day before the list was posted, and look at return in the month since then, the portfolio is up only 1.3%, versus the S&P up 2.9%.

I'll keep tracking the results for years to come and update this space!

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