Two New Investing Anomalies

First is "Institutional Investors’ Investment Durations and Stock Return Anomalies: Momentum, Reversal, Accruals, Share Issuance and R&D Increases" by Martijn Cremers and Ankur Pareek. They created a measure of institutional investor investment horizons based on quarterly institutional investor portfolio holdings, which is the 'average stock duration:' the weighted average of the duration the stock has been in the institutional portfolios. They find that

"the stock returns momentum anomaly only occurs for stocks that are generally held by short-term institutional investors. Similarly, the accruals and share issuance anomalies are much stronger for stocks with shorter investment horizons. Finally, short-term investors also under-react more to increases in R&D investment."

Second is "A Tale of Two Anomalies: The Implications of Investor Attention for Price and Earnings Momentum" by Kewei Hou, Lin Peng and Wei Xiong. They find that

"earnings momentum profit decreases with turnover [and] that the long-run returns of the earnings momentum portfolios for months 13-36 after portfolio formation show no sign of reversal. These results support our hypothesis that investors' underreaction to earnings news drives the earnings momentum effect and that the degree of underreaction weakens with investor attention."

The presence of short term investors is associated with stock mispricings. The accrual anomaly consists of investors focusing on headline earnings and failing to distinguish between accrual and cash flow components of earnings. Short term investors seem to be fixated on headline earnings, indicating that they are not reading financial statements very carefully. Or, alternatively, they buy stocks for trading and not for owning. Similarly, the benefits of research and development are long term and so short term investors ignore them.

Someone on Twitter was asking: why does every trade need a catalyst? Well, if the S&P 500 paid a 7 percent dividend yield, would anyone care about catalysts? What if companies with great moats like Google or railroads paid 7 percent dividends? Obviously no one would care about catalysts, they would just clip coupons.

I wonder whether the focus on catalysts is because the market is overpriced, in the sense that no one can live off of the coupons on a portfolio, and so staying ahead requires painstaking and original investment research looking for catalysts?

How does this relate to the short term investing anomalies? Well, by definition, a catalyst is a value-unlocking event that you hope happens soon. Focus on imminent catalytic events may be what causes short-term investing.