Pretty interesting, so I invited one of the authors of the study, Vallapuzha Sandhya onto Tradestreaming radio to discuss her findings with us.
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In fact, that’s what this podcast is all about, investment decision making. How do we decide what to buy? How do we even think of a stock to begin researching? We spoke a lot about on this podcast and a lot of research into what captures investor attention, whether it’s a marketing spin of a publicly traded company, whether it’s the media. What about ticker symbols? That’s the paper we are going to look at today. It’s called, “Does Investor Attention Affect Stock Prices?” It was written by three researchers at Georgia State University, including Vallapuzha Sandhya. I apologize if I mispronounced your first name.
She joins us on this show today to take about this paper. The researchers created what they call attention portfolios. These are typically portfolios of small cap stocks with ticker symbols very similar to those of larger cap stocks enjoying a run in their stock prices.
These portfolios typically yield between 1% and 3.3% analyzed access returns, meaning beyond the market. That’s pretty interesting. That means some how investors researching a stock they come across the stock with a similar ticker light bulb goes off in their head, they do their research and say that’s worth buying. That to me is interesting, that stock discovery process.
So Sandhya is going to talk about this particular research process. She is also working at Financial Engines. She is also talking a little bit about her experience there. She will make sure as a disclaimer that her participation of this podcast is an academic as a researcher and not as an employee at Financial Engines.
Thank you very much, Sandhya, for participating in this show. For joining us it was a great conversation. I enjoyed it a lot. I hope you enjoyed it as well. I’m Zack Miller, your host, and this is Trade Streaming radio. You can catch this podcast as well as archives of my program at www.tradestreaming.com.
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Sandhya: Yeah, basically from India, so I did my education my Bachelor’s and Master’s and Mathematics in India. I have always been interested in sharing my knowledge with others. That’s one asset you share. That took me into the course of teaching. I taught mathematics for about five to eight years. I taught part in India and then I moved to Singapore where I was teaching.
It was during my teaching courses that I started a course on business statistics and that really led me to the [stop] field of finance. I saw a lot of publications of math in finance. That got me intrigued in the aspects of finance so I decided to take the plunge and do my Doctorate in Finance.
That’s why I moved to the U. S. and I studied at Georgia State University in Atlanta. I did my PhD there. I graduated recently from there. It was during my interaction with my professors in the course, that it opened up a lot of ideas. I learned a lot of things that I never thought about before.
One of that was the behavior of investors. What makes them tick? What do they think about when they are making their investment decisions? There is a lot of literature that talks about the advisors that they have.
One of the outcomes of the conversations was a paper that was talking about investor attention and the other of them was that I realized that there is different genre of investors who are retirement plan participants. This [includes 04:30] behave in a really different way. That is the basis on which I did my dissertation work. So it was [inaudible 04:41]
Zack: I would love to here that second part. Can we start first with, “Does Investor Attention Effect Stock Prices,” that’s incredible? The other piece is also incredibly interesting. Can we first drill down on the first piece, and then we will move on to the other.
Sandhya: Oh sure.
Zack: There are different ways other researchers have found to engage investor attention right.
Zack: It could be searches on the internet. It could be the investor relations spin that a company puts out. Why focus on the ticker structure?
Sandhya: Okay. One of the things a lot of times attention is to drawn to stocks which have high returns or sometimes high volume. But what happens when a stock it probably has something happening in the company that causing these high returns.
What we are trying to do was try to find a way that we can isolate the attention part without something happening to the fundamentals. So what we thought was if you hear about something happening to a big company, say Apple, given that a lot of people now do their trade over the Internet so most of the time all you usually know about the company is the ticker symbol. That is what you see it.
You’re searching about what’s happening to Apple on the Internet. You see other companies with close tickers and you might be drawn to those companies. You never new about AAP, but you were Googling on APL and you happen to see this AAP and you say that looks good.
Zack: It’s almost like accidental discovery in a way, right?
Sandhya: Yes. It is accidental discovery. What we are trying to see is that there is this spill over effect and nothing much has happened to AAP by itself. It was not in the radar at all. But the people seem to be learning about these companies merely because they are associated with the ticker symbol. Then they invest in these small companies. So we see that surge in the price of the returns are higher for these smaller companies and we are looking at these smaller companies because that is where the retail investor possibly makes a change in the price. If you look at big companies, it’s all [inaudible 07:18] back that rarely makes a difference.
Zack: Right. In the past, other research has looked at these portfolios of smaller cap companies where the actual trades were made mistakenly. Like somebody put in the wrong ticker symbol, you are not talking about that. You are talking about the discovery process might be accidental but when somebody goes to buy that stock they are determined to buy the stock they researched.
Sandhya: That is one of the tests that we do to see if it is just confusion if they think it’s Apple and they are thinking they are holding Apple but they are holding AAP. Is that the case, or they are going into learning it is AAP? That’s what we are looking at and I think the way we are trying to differentiate that is if you think it is Apple and something good happens to Apple you are going to buy, but if something bad happens to Apple you are going to sell. Your movements are going to be together. What we are finding is that whether something good or bad happens to Apple, people are still buying the small stocks. The retail investors are still buying.
Zack: So you created these portfolios you called the attention portfolios of these small cap stocks that were close in nature in their ticker structure to larger cap companies, right?
Sandhya: Right. Large companies which had high returns or high volume. We tried two different things
Zack: How did those attention portfolios perform?
Sandhya: On average you have about 25 basis points over a period of 20 days. If you annualize it, it comes to around 3%. Ranges, we tried different specifications. We tried [inaudible 09:05] of the industry and so on but it changes 1% to 3%. I’m not saying it’s a great strategy because a lot will depend on your transaction costs and [inaudible 09:17] spread, given that small companies, the spread is going to be higher. You need to take all that into account. We are not taking the cost into account with the 3%.
Zack: Was there a drift associated with that? Meaning did you have to buy in right away when the news hit on the larger on the larger cap company? I mean after the larger company had significant returns, or could you get in at any period of time?
Sandhya: The way we looked at it, we look at what happens over the next 20 days after the last company got high returns.
Sandhya: That’s what we’ve studied so far. It looks like it’s increasing in the first or second week, [inaudible 10:05] third week you could get two weeks later. You wouldn’t’ have the people [inaudible 10:10] done but I don’t know how long before it goes. We jut started a 20 day period.
Zack: How did you define proximately in ticker symbols? Can you tell us how you got that method?
Sandhya: Sure. What we used is something called a lemon stain distance measure. Basically the simple idea of . . . I would let you play the game as a kid where you start with a 4-letter word like rose and you see how many steps it takes you to get to the word peel. Each time you can change just one letter. That’s the basic measure that we use.
How many letters or how many changes do you have to make to go from one ticker to another? We use that to generate our measure for closeness. That you have more steps than your foot set apart. If you have to just make one step, then you’re really close. That’s the distance measure that we use. We kind of waited for [the position] so we believe that if the first letters are close or the same, they are closer than the last letters being the same. We had a weighted average of the changes.
Zack: It’s interesting. This whole idea of idea discovery or stock discovery was something that I haven’t studied in the way you have studied but something that I worked on. I used to run business development and advertising sales for Seeking Alpha, which is like the largest second generation investing site.
Our idea was that we had these conference transcripts. We were doing this for free. It was a business that Thomson Reuters used to sell for tens of thousands of dollars a year. We gave them away for free.
The idea was, they would be ad supported. If GE or GM had transcript up there they wouldn’t necessarily sponsor that transcript, but a small cap stock that was a competitor to GE or GM that was contextual into that business would want to advertise on that because that was how they would get discovered. It didn’t end up working out that way but that was the whole concept. That just got me thinking, “how do investors discover these types of small cap companies,” because it is very hard.
Zack: Investment banks are not writing about them. They are not written about in the newspapers. They are uncovered.
Sandhya: The do not have analysts following them.
Sandhya: Yes. In fact, initially in thinking more in the name similarly and name but I think it makes it a lot noisy to try to compare their names. Then we felt that these days with the Internet being the radius people are associated more with the tickers, at least more interesting than would be names. We just thought this was cleaner to define the distance and it may not capture everything but it does seem to show there is some association just based on tickers.
Zack: What’s your gut feeling like in Asian stocks which are listed in numeric format? Do you think you would find the same type of behavior there as well?
Sandhya: That’s interesting because it is also the home bias that U. S. investors tend to stick with US stocks.
Zack: I was just wondering if there is something about the letters that you wouldn’t find in the numbers.
Sandhya: That’s possible. I hadn’t thought about that too much. That might actually be an interesting thing to look at. I need to see how much data, yeah, where the numbers have the same thing as the letters. A lot of times if you see [inaudible 13:59] have tickers that make it readable like “cake”, or “love”, or “words”. That’s not going to happen with numbers. That’s interesting to see.
Zack: Did this lead to more research? Are you digging deeper here? You finished your PhD, are you now working in the field?
Sandhya: I’m working and actually the job I’m doing is related to my second because it is related to my dissertation. I’m still interested in the behavior, I’ve kind of shifted more to the retirement plan. That’s my bigger interest I’ve made.
Zack: Can we talk about your dissertation and your work now if you feel comfortable doing it.
Zack: You talked about a real different investor in the retirement plan world. Can you describe how they are different?
Sandhya: Okay. I started looking at this during the crisis. What I realized was that investors in the retirement plans are more interested in literature? Which is showing they don’t really make changes to their portfolios. A lot of times they’re almost clueless as to what is happening.
What I understood from my reading was that there’s been a general shift in the way the retirement plans are structured defined benefit plans. And now more and more it’s shifting to defined to contribution plans. What that means is the responsibility for investing which was with the employer initially is now shifting to the employee.
So the employee has to take responsibility. He is now in charge of what he’s going to get 20 to 30 years down the line. I saw that a lot of these employees are not prepared for it. They are already busy doing their work and so they are not prepared to spend the time to do these investment decisions that they are now forced to do.
Zack: That’s why there’s been a movement in the behavior finance community to create products or create a system using the same behavioral biases to help funnel them to make better decisions. Did your research focus on that aspect?
Sandhya: My research was more about the target difference. That was one of the products that came out with the purpose of helping these retirement plan participants. Because now all you do is have to do is try to estimate when you are going to retire and then you can just chose a fund that is close to your retirement and you don’t have to worry as much. That was the idea about these funds.
Zack: Why, because the fund recalibrate as an allocation as you get closer to your goals?
Sandhya: Right. All that needs to be done in terms of accumulating the assets, you don’t have to worry about putting everything you have into a single fund. You don’t have to make those decisions.
Zack: From what I’ve seen, those funds still haven’t caught on in the plan community. There’s a foot hold there but they haven’t achieved the widespread success the industry thought. Do you have thoughts as to why that would be?
Sandhya: It’s growing rapidly so I think those are really good and one of the things is that now they are the TDIAs. They are used as the default instrument in a lot of plans. To that extent a lot of investors or employees who don’t do anything are getting channeled into these funds. To that extent I think the growth is probably pretty good.
Zack: Meaning now you would have to opt out of them. You automatically get this for certain plans.
Zack: It’s a default option.
Sandhya: They came out of automatic re-enrollment. Many plans they get defaulted into the targeted fund. If you didn’t want it you move out of the targeted fund. I think it’s catching up.
Zack: They took sort of a beating in the media during the crisis because of their promises of achieving goals they would have to become almost too aggressive to achieve some of their goals longer term.
Sandhya: That’s what led to my dissertation and I did find some troubling aspects for the fund in my dissertation. It didn’t come out in flying colors. One of the things I realized was that the funds are structured in different ways. It’s not really that clear to an investor that there is a difference in structure but some of these funds are actually fund to funds, so they invest in a lot of funds as opposed directly in stocks and bonds.
When they invest in other funds, some of them invest in other funds than their own family. My research is finding out that there might be some agency conflicts when that situation happens. When you are investing in other funds in your own family, what kind of underlying funds do you put into this basket? My research is showing that on average it seems that some families may be packaging funds that are of higher expenses and lower performance into these targeted [data] funds.
Zack: Do those fund-to-funds have some type of wrap fees? Or are both of the fees passed through to the end investor typically?
Sandhya: Initially they did have wrap fees during 2008 if you look at it before 2008 they had these underlying fees and they had the wrap fee. Usually they would only show the wrap fee which would be about 10-15 basis points or so. The underlying fees were not really the reason because it was part of operations. It’s not related to the investor.
But there have been changes lately, so now a lot of companies are waiving the wrap fee because it’s not there for many companies. They do show in that perspective at least, that one of the total fees first. So there is a mention of what they are paying. It’s not the easiest thing to find out of any fees. If you look hard enough, you can find what the total fees is.
Zack: I feel as at least from where I see Vanguard is getting a lot more aggressive in that field with target date funds I assume that puts downward pricing pressure on everybody in that space.
Sandhya: Right. I think the fees are coming down and they should. I can’t say all fund to funds are bad or anything like that but it’s just that the structure goes wide with incentives and some families may be looking at. It’s something that is plan sponsored and you just have to be aware of. You are putting it in a targeted fund. All of them are not the same. Be sure you do some basic research as to what is going into the fund. Are you comfortable with those ingredients?
Zack: It’s a little off the track here, but there is this whole fund family called Bullet Shares. They were ETFs and they basically ETFs of bond funds. The problem with bond funds is they are the interest rate risks. You don’t actually own a bond that matures, so you don’t know what you are getting along the way. They have the ETFs that have a forced maturation date where you can buy a set of bonds that matured in 2016 and you would get your capital back at the end. I don’t know how well those have taken on. I thought that did away with some of the agency issues that you see in the fund to funds space.
Sandhya: I’m not familiar with these funds so I can’t comment too much on that. Seems interesting because you are almost guaranteed your capital.
Sandhya: Okay. That sounds interesting.
Zack: I don’t they’ve taken off very well but I don’t think people understand them well enough to understand the role they would play. Can you talk a little bit about your professional career now? You got your PhD. You focused on target date funds and a lot of research there. Are you working now in that space?
Sandhya: Yes, the company I work for is Financial Engine. I’ve been with them a couple of months now. What took me down there was a company started by Bill Sharp.
Zack: I was just going to say that’s Bill Sharp’s company.
Sandhya: It is. And I really like his mission. The idea that you take sophisticated investment tools available for [inaudible 23:20] investors and make them available to the average American worker who now has the responsibility for retirement plans.
I thought it was a really neat idea and that goes very much along my line of business because I was also trying to see looking at the plight of the average American worker who is responsible for their retirement but doesn’t have much of a clue what to do. They are the people that need help and that’s exactly what this company is working on. I thought it was a great fit for me.
Zack: I was going to say jut hearing it sounds like a great match for your background your skill set and sort of where your head has been for the past few years.
Sandhya: Exactly. I’m really happy in the sense people that I’ve seen the people with whom I’m working with in the past couple of months. They treat their employees with passion, people who care. I think that’s really nice because everywhere you hear people are trying to make money for us, that’s true, but I think what kind of binds the people in the company together is a common fashion that what will we do? We are trying to make it a little better for someone else. I think that’s really nice.
Zack: That’s great. They’re based in Silicon Valley. Did you move to the West Coast?
Sandhya: Yes I did. I moved to the West Coast. I am now in San Francisco.
Zack: Very good
Sandhya: It was a big move.
Zack: It must be a huge culture shock coming from Atlanta.
Sandhya: Yes. It was a culture shock in the first place coming from Singapore to the U. S. And now I realize that there is so much diversity within the U. S. from the East to the West. Everything is different. I am getting used to it. I like it. As I said, I am really excited about the job because I think it is what I have been thinking about for my dissertation and it gives me a way of using all that I have learned to actually translate it to help people and I think that is really needed at this point. That people need that extra assistance to help make that.
Zack: For sure.
Sandhya: Back to their retirement goals.
Zack: Are you doing research or are you taking a lot of the abstract knowledge and helping build that into their product?
Sandhya: I’m doing research. It’s an associate position. I’m still doing research there. We are trying to see what other ways we can improve. They have a good system, but we are [inaudible 26:26] my job is to see what are ways we can improve. Make it better. And there is always room for improvements so just trying to work on those aspects and see what is best we can do. Part of it is to research articles to see what ideas are there in academia and see if those can be translated and implemented for [inaudible 26:56] and they also have a professional manager [inaudible 27:01]. You can put in all your other research, which are not in your 401(k) plan. So you can give input on your entire portfolio and then try to see what is the best for you, what works the best for you.
Zack: That’s a great platform and they were very early in the evolution.
Zack: One question I like to ask and I typically end the interviews on this if you can name resources that you typically go back to for your own research that you find are useful you keep bumping up against either online or offline resources that you can highlight for my listeners?
Sandhya: Typically from my research in terms of investments probably going with the index funds and the two things that I focus on is diversification and keeping the fees low. I think that’s one place where people lose their money when they are paying too high fees. You need to know what you are paying the fees for and you need to be sure that what you are getting is what the fees you are paying. So in general, I stick to the index funds to keep the fees low and [inaudible 28:28] and broad diversification. I just spread across [inaudible 28:34]
Zack: In terms of allocation are you looking at external models. Are you building those yourself? What are you reading that acts as an input for those types of decisions?
Sandhya: In general I keep myself updated with the research work that is going on but I don’t use any specific tool per se. I prefer equal allocation across the asset classes. What I am more interested when you have research coming up that shows whether commodities is a new asset class or is it covered by [inaudible 29:16] asset classes.
Sandhya: That is more the kind of things, it’s rates. If you have equal components of the in asset classes. So it’s not just stocks and bonds. Within stocks, you already know that you have the large cap and small cap value, they both have value. I try to see that if there is a new asset plan represented that fit into these or do you need something specific for that.
Again, [etraders] I still want the letters some kind of index on that before I rush into it. I prefer to go to an index fund or asset-based, something like a symbol stock selection that I think stock selection [inaudible 30:07]. I don’t want to go down that. I don’t have that much confidence in my skills there. Plus going with the index is a lot better. That’s what I try to do. I try to get my diversification across the asset class. That’s important. As I said earlier I just keep my eyes out, if there any factors that [inaudible 30:37], that’s when I try to mortify the allocation.
Zack: Sandhya this has been a great conversation. I appreciate your time and energy on the interview. I thank you for participating.
Sandhya: It’s my pleasure. I enjoyed it. I love your podcast. I’m probably going back more often. I did see that you have quite a few groups there, and I will check them out but [inaudible 31:03]. Thanks a lot.
Zack: Thank you.