The recent appearance of Michael Lewis, author of Flash Boys: A Wall Street Revolt, on 60 Minutes, created quite a stir about the impact of high-frequency traders (HFTs), claiming the game was, and has been, rigged, with the victims being all investors. High-frequency trading is a set of computerized trading strategies characterized by extremely short position-holding periods….
Summary Ideally, to eliminate style drift investors should rebalance daily. However, because the real world involves costs, investors should reduce, not eliminate, style drift to an acceptable level. Investors should rebalance wherever there is sufficient cash to make the effort worthwhile, thus eliminating any tax issues and either eliminating or minimizing trading costs. An investor’s…
From 2000 through 2010, the MSCI Emerging Markets returned 10.9 percent a year, outperforming the S&P 500 by 10.5 percent a year. In typical fashion, investors flocked to emerging market funds. Since then, returns have been poor, providing negative returns in both 2011 and 2013 (as well as in the first two months of this…
Summary Investors often don’t properly diversify because they think international investing is risky. U.S. equities are mistakenly assumed to be the “safest.” Even if the U.S. is the safest, that does not mean investors should have all their eggs in one basket. Financial economists recommend that investors add international assets to their portfolios, because they…
William Sharpe and John Lintner are typically given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM). CAPM provided the first precise definition of risk and how it drives expected returns. The CAPM looks at returns through a “one-factor” lens, meaning the risk and return of…
My last post showed that the quality (or profitability) premium provided valuable insights into not only U.S. stock returns, but international developed markets as well. Today I’ll look at the question of whether this quality factor applies to emerging markets. The simple answer is yes. To review, the profitability/quality factor tells us that more profitable firms outperform…
Today’s post will begin a two-part series that explores the research examining risk-based explanations for the value premium, which, unlike the risk-based explanations of the size premium, have been a bit controversial. In June 1992, the paper “The Cross-Section of Expected Stock Returns” was published in the Journal of Finance. The authors, Professors Eugene F….
I have a high regard for accountants. They have an extremely difficult job. In order to maximize tax savings for their clients, they need to understand and interpret an incredibly complicated Internal Revenue Code. Former U.S. congressman John Hostettler once said, “The Internal Revenue Code and regulations add up to 1 million words and is nearly seven…
Exchange-traded funds are open-ended funds that can be bought and sold on a stock exchange. You can think of them as a hybrid version of both stocks and index funds. You buy them using a broker, just like you would to purchase a stock. They consist of a portfolio of securities that are designed to…
The recent appearance by Michael Lewis on 60 Minutes and the publication of his book Flash Boys has generated a furor over the perceived inequities of high-frequency trading. The idea that those engaged in high-frequency trading are permitted to “see” your trades, purchase stock ahead of your order and resell it to you at a higher price is clearly…
Everyone wants higher returns. To many investors, success in investing means generating “alpha.” If you are an investor in mutual funds, that means trying to generate returns in excess of the benchmark index designated by the fund. There are still many investors who participate in the pursuit of alpha, but the numbers are diminishing. In…
I love Michael Lewis’ writing, but I have some surprisingly good news to share about the high-frequency trading scandal revealed in his new book: High-frequency trading is not likely to hurt disciplined, long-term, low-frequency-trading investors. In fact, it might even help. Yes, it is almost impressive that Wall Street has managed to produce yet another scandal, even…
Let’s start with a parable. Next to a mountain trail stood a twisted, gnarly tree. Hikers loved the shade it provided, but one day, a guy with an ax came along and decided the tree could do more than provide shade. He thought the tree would make a great table. So he chopped it down…
An ongoing debate among investors is whether an active or passive strategy is most likely to give you the best results. Twice a year, Standard & Poor’s releases their active vs passive score card (officially called the S&P Indices Versus Active Fund report, or SPIVA for short.) The analysis compares actively managed funds against S&P index benchmarks,…
My last post addressed the concerns investors had about the dollar potentially losing its status as a reserve currency. Today, we’ll take a look at what actions you might consider taking if that was a risk about which you are concerned. First, you could increase your allocation to international equities. For example, in the case of…
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