Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters

This paper analyzes the equity-portfolio recommendations made by investment newsletters. Overall, there is no significant evidence of superior stock-picking ability for this sample of 153 newsletters. Moreover, there is no evidence of abnormal short-run performance persistence (hot hands). The comprehensive and bias-free transactions database also allows for insights into the precision of performance evaluation. Using a measure of precision defined in the paper, a transactions-based approach yields a median improvement of 10 percent over a corresponding factor model. This compares favorably with the precision gained by adding factors to the CAPM.