Chasing the Story

In the New York Times yesterday, Hal Varian wrote about a new study conducted by three finance professors at the University of Richmond (Thomas Arnold, John Earl Jr., and David North). These scholars published a paper entitled, "Are Cover Stories Effective Contrarian Investors?" They examined how a company's stock price changed after the appearance of a cover story published in one of the leading business magazines. Arnold, Earl, and North discovered that journalists tended to write cover stories after a period of unusually good or bad performance on the part of a company - positive stories about high performing firms and negative stories about poor performers. However, after the stories are published, the companies about which positive stories were written do not perform much differently than the firms about which negative stories were published. What's the lesson for investors? Do not try to time the purchase or sale of securities based on what you read in glossy cover stories. Of course, those of us who believe that the American capital markets are relatively efficient should not be surprised by this result. The cover stories often do not constitute breaking news to the investor community. They already know much of what is being written in these pieces, and thus, the stock price has adjusted to that information prior to the publication of the magazine.