What's best for the stock market investor: a do-it-yourself approach to buying and selling or reliance on professional advice?
Well, in the case of at least one national brokerage house, it might well have paid to take its own recommendations. A National Bureau of Economic Research paper by research associates Wilbur G. Lewellen and Gary G. Schlarbaum, and Kenneth L. Stanley of Emory University, found that following the unidentified firm's buy-and-sell suggestions would have been rewarded fairly consistently by a return about 2 percent per year above the broad stock market averages.
Such research results are encouraging to Wall Street. Brokerage houses and publishers of market letters spend large sums hiring stock analysts and other researchers to produce investment studies and recommendations for their customers.
Several years ago, however, Wall Street was alive with talk of the ''dart board theory of investments,'' alias the ''random-walk hypothesis'' or the ''theory of efficient markets.'' To oversimplify, the theory holds that an investor need not buy expensive investment research. He can get just as good a rate of return in the stock market by throwing darts at the newspaper's stock lists and selecting a portfolio that way.
Variations in the performance of stock portfolios, certain academics argue, are the result of pure chance or differing levels of risk among the stocks in the portfolio. Differing performance is not due to the investment sagacity or stupidity of the portfolio manager. Ever since that theory became popular, investment analysts and others have tried to disprove it.
So the National Bureau's research, showing that at least one brokerage house beat the averages consistently, might boost spirits in the investment research community.
An extra 2 percent return, compounded annually, could be a significant reward for an investor. It would cover his or her commissions on stock trades and presumably make it worthwhile to take the trouble to read the research reports of a brokerage house.
Data for the NBER investigation consisted of a file of all common stock transactions executed between January 1964 and December 1970 in a random sample of some 2,500 accounts of the nationwide retail brokerage firm. The account holders were all individuals, rather than corporate or institutional. About 175, 000 separate trades in just under 4,000 common stocks are included in the file.
The authors find that by following the recommendations, customers could not only in theory beat such a broad average as the Standard & Poor's 500 stock index: They actually did when they followed the advice. Moreover, the advantage holds up even when the varying risk involved in the stocks recommended is taken into account.
''Indeed,'' the authors write, ''certain of the annualized differential-return figures are quite impressive. The securities research reports at issue must therefore have contained at least some new information and/or analytical insights of value.''
Interestingly, investors did especially well if they bought or sold the stock several days in advance of the formal recommendations themselves. This anticipation, the authors explain, ''is attributable to information 'leakage' in the research process within the brokerage firm. Account executives will frequently learn of the tone of a research report while it is still in preparation, and begin to pass along trading suggestions to their customers before the report is formally released.''