As a result, they said: “We find no announcement effect associated with these changes — with returns only accruing when the information is later revealed through news, events, or earnings — suggesting that investors are inattentive to these simple changes across the universe of public firms.”
Investors are apparently still being inattentive. An excellent “Heard on The Street” column in The Wall Street Journal in June 2017 by Justin Lahart reported on an earlier version of the “Lazy Prices” findings. In that column, Mr. Lahart said explicitly that investors might profit by following the researchers’ methods. And in August, the open-source Quantopian investing site created an algorithm replicating the researchers’ methods, and found that the results remained robust: A new model portfolio outperformed the market.
In other words, word changes in corporate reports still appear to be signaling subsequent changes in stock prices and few, if any people, have noticed. That suggests that scarcely anyone has been reading corporate reports thoroughly — and that scarcely anyone has read the “Lazy Prices” paper, either.
To be fair, the clues unearthed by the researchers’ approach are fuzzy and imprecise at best.
In November, for example, I asked Professor Cohen how I might make practical use of his insights.
He suggested two things: “First, always download the previous version of a corporate report as well as the current version, so you can compare the language. Focus on the differences from year to year. Second, focus on one section, the ‘risk factors section.’”
I did just that, looking mainly at the latest Apple corporate report, posted on its website on Nov. 5. There was plenty of new language describing the risks that Apple faced — risks that Apple executives discussed in November and disclosed more directly in a letter to shareholders on Jan. 2.
These risks included the possibility of an economic slowdown in a place like China, the possibility of slowing iPhone sales, the threat of a trade war and the potential impact of unfavorable foreign exchange rates. All of these risks have actually materialized and Apple shares have sunk, pulling down the overall stock market.