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This paper answers the comments of readers of our earlier paper. Additional insight is gained by adding recent data to show the effect of following Value Line Investment Service recommendations in active stock market trading over the years 1974-81. We show that Value Line makes a statistically significant contribution, which cannot be explained by the Beta risk factor. We offer our results as an unexplained divergence from the Efficient Market Hypothesis, but with the tentative hypothesis that investment timing (i.e., the fact that the Efficient Market Hypothesis does not operate instantaneously) may explain much of the abnormality. OUR PREVIOUS PAPER [5] TESTED whether the performance of the Value Line Investment Service (VL) was inconsistent with the Efficient Market Hypothesis (EMH). We showed (using data through 1977) that the VL system represented a borderline case. When transaction costs were neglected, abnormal returns were obtained. When realistic transaction costs were used, active trading according to VL recommendations yielded abnormal returns, but not significantly so. For a Buy-and-Hold policy, however, VL recommendations did yield abnormal returns, even when transaction costs were considered. Our previous paper drew a number of comments from readers. We offer our reply to these comments in Section I below. Further insight into the comments is gained by considering added data, and the present paper adds data for the years 1978-81, discussed in Sections II-V. With the benefit of the added data, we show that the active trading returns, already positive, now become significantly positive. We conclude that Beta does not offer an explanation for the abnormal yields. We offer our results as an unexplained divergence from the EMH, but with the tentative hypothesis that investment timing (i.e., the fact that the EMH does not operate instantaneously) may explain much of the abnormality, particularly for the active trading results. |
