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‘Sure Things’ That Weren’t This Year

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At the start of each year, I put together a list of predictions made by gurus (and often repeated by investors, who hear about these forecasts through the financial media). It’s sort of a consensus of things “sure” to happen in the upcoming year. We keep track of these “sure things” with a review at…

Annuities & Problems Of Longevity

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As the director of research for The BAM Alliance, I frequently receive questions related to the advisability of purchasing payout annuities (as opposed to variable annuities, which I generally categorize as products meant to be sold, not bought). Combine the relatively poor performance of equities since 2000 (the S&P 500 returned just a little more…

‘Smart’ Money Blunts Mispricing

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A large body of evidence demonstrates the persistence of numerous anomalies in stock prices, which suggests they can depart from fundamentals for periods of time. The anomalies include: Failure Probability: Stocks with a high probability of failure have lower future returns. O-score: Stocks with higher O-scores (a higher probability of bankruptcy) have lower future returns…

Spikes Can Explain Returns

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Recently there has been a lot of research on the question of whether higher moments of return other than volatility (specifically, the skewness of returns) helps to explain equity returns. (I’ve included a brief definition of skewness and a demonstrative example of it below.) For instance, the role of idiosyncratic skewness has been put forward…

Glamour Can Distract Investors

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There’s very strong historical evidence to support the existence of a value premium in equity markets. While there’s no dispute over the existence of the value premium (value stocks have provided an annual average return 5% higher than growth stocks over the long term), there is much debate over the cause of the difference in…

Value Beats Glamour

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Earlier this week, we examined a recent study contributing to the literature that supports a behavioral-based argument for the value premium, in particular that investors persistently overvalue the earnings prospects of growth (“glamour”) stocks. The study—“Glamour, Value and Anchoring on the Changing P/E”—posits that the differing experiences of glamour and value investors could be explained…

Stay Diversified Through Lows

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There are several keys to having a successful investment experience. The first is to create a well-thought-out financial plan. This plan should begin with identifying your ability, willingness and need to take risk, as well as what it is you want your money to do for you. Having identified all the appropriate risks and objectives,…

Liquidity Key Price Factor

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Liquidity—the ability to buy and sell significant quantities of a given asset, quickly, at low cost and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less liquid securities. For example, liquidity risk partly explains the equity-risk premium. The average…

Active Funds Whiff Again

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The year-end 2015 S&P Active Versus Passive (SPIVA) scorecard provides yet another example of why—at least when it comes to the overall results of active management relative to appropriate benchmarks—the past is in fact prologue. Following are some highlights from the recently released report: Domestic Equities Last year, 66.1% of large-cap managers, 56.8% of midcap…

Don’t Bother Timing Premiums

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Because of the magnitude, persistence, pervasiveness and robustness of their related premiums, several factors have dominated the academic literature. Among them are market beta, size, value, momentum and profitability. However, despite their persistence, each factor has undergone even fairly long periods during which it produced negative returns. Said another way, while investors can raise expected…

Testing The Beta Premise

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One of the most important issues in finance concerns the relationship between risk and expected return. John Lintner, William Sharpe and Jack Treynor are generally given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM), which was developed in the early 1960s. The CAPM provided the…

When Trading Detracts From Alpha

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As explained in my latest book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, accompanying the rapid growth of the actively managed mutual fund industry, the average performance of mutual funds has been trending downward over the past few decades. Teodor Dyakov, Hao Jiang and Marno Verbeek—authors of the study “The Trading Performance…

Volatility Threatens Discipline

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This is my fourth article in a series devoted to helping investors stay disciplined in the face of market volatility—and even lengthy periods of underperformance by risky assets. The first was a December 2015 post dealing with what I call “investment depression.” The second was a January post designed to help investors deal with the…

Don’t Buy Winners

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For almost five decades, the literature on the investment performance of mutual funds has found that very few managers possess sufficient stock-picking or market-timing talent to allow them to consistently and reliably produce positive risk-adjusted performance after considering their fees. In other words, there’s little to no evidence of outperformance beyond the randomly expected. As…

High Frequency Trading’s Impact

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The effect of high-frequency trading (HFT) on market quality is important, and has generated strong interest among academics, investors and regulators alike. Graham Partington, Richard Philip and Amy Kwan—authors of an October 2015 paper, “Is High Frequency Trading Beneficial to Market Quality?”—examined how HFT has changed the dynamics of the market and whether traditional academic…

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