New study suggests the wealthy just pick better stocks
It may seem almost perverse, but the well-to-do are apparently better stock market investors than the less affluent.
Those with incomes of more than $200,000 a year made an average 8.3 percent a year in capital gains in 1973 on sales of corporate shares. Individuals earning from $0.00 to $20,000 got a return of only 4.7 percent a year on the stocks they sold in that year.
That may be less surprising to popular instincts than to the academic. Many academics believe that the stock market is ''efficient.'' This means, they argue , that there are enough buyers and sellers active in the market and examining the latest public information on the individual corporations that it is extremely difficult for one investor to beat the market averages consistently. An individual investor may have a string of luck and beat those averages for a while. But that is merely chance. Or an individual may choose riskier investments that pay a higher return and beat the market. However, with portfolios of equal average risk, the returns will vary only according to a normal distribution of chance.
Since a number of highly mathematical analyses of massive numbers of stock transactions in the early 1970s popularized the theory of efficient markets, investment managers and academics have tried to find holes in this theory. After all, if the theory was right, the investor might as well choose a diversified portfolio by throwing darts at the stock market tables of the Wall Street Journal.
Certain investment managers, such as Value Line, Templeton, or Wright Investors, have claimed to consistently beat the broad stock market averages with their recommendations or actual portfolios. Batterymarch Financial Management, a Boston firm, also has maintained that it has found less-than-perfect, and thus profitable, corners of the market at various times.
Now two National Bureau of Economic Research economists, Martin Feldstein and Shlomo Yitzhaki, claim to have evidence that ''the corporate stock owned by high-income investors appreciates substantially faster than the stock owned by investors with lower income. . . . The evidence indicates that the differences are large and that they have persisted for a long time.'' (Dr. Feldstein has just left the presidency of the bureau to become chairman of President Reagan's Council of Economic Advisers. Mr. Yitshaki is a professor at the Hebrew University of Jerusalem.)
An advocate of the theory of efficient markets, Fischer Black, a professor of finance at Massachusetts Institute of Technology's Sloan School of Management, says the paper offers only ''very indirect evidence of portfolio performance.'' The two authors themselves admit that since their paper is the first evidence of income-class differences in investment performance, the results ''must be regarded with some caution.''
Popular views probably would hold that the rich have better sources of information and spend more time managing their portfolios and thus should do better than the poor or less affluent. But that argument does not satisfy the academics. They figure there are enough people with good information to quickly evaporate any special stock market opportunities by buying and pushing up the price.
Messrs. Feldstein and Yitzhaki, who analyzed a sample of 57,676 individual federal income-tax returns that reported stock capital gains in 1973, also note in their paper some possible explanations for this rich-poor phenomenon.
It could be, they say, that higher-income groups enjoy greater share-price increases because they take systematically greater risks. That would square with the theory of efficient markets. The data, they admit, provides no way of evaluating the riskiness of investors' portfolios. In any case, they note, the differences in returns are so large that the degree of riskiness would have to vary very substantially to account for them.
Further, it could be that high-income individuals have more and better ''inside'' information. But the two find no indication in the data that their short-term investments do better than their long-term buys.
As to the argument that the well-to-do can devote more time and other resources to portfolio management, Feldstein and Yitzhaki note that smaller investors can also buy professionally managed mutual funds. Nonetheless, the richer investors usually would be putting smaller amounts of money into an individual stock choice than a mutual fund, and thus might not alter the market price so much by an investment.
Finally, the authors admit that their findings may be only the result of a ''statistical artifact,'' a tendency for lower-income individuals to underreport capital gains more than the well-to-do. But they find no evidence of that.
Profit taking hit the stock market late last week, but the Dow Jones industrial average rose 10.12 points for the entire week.