By Jack Forehand, CFA (@practicalquant) It is no secret that value investing strategies have struggled for a long time now. The extended period of underperformance has tested the patience of many value investors and has led some to abandon the approach entirely. Adding to the frustration have been the frequent calls from some well-known value investors that we are at or near the end of this period of underperformance and that value is about to… Read More
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Never Say Never
By Jack Forehand, CFA (@practicalquant) Never tends to be an overused word in investing. Don’t get me wrong, I am big believer that the past is often the best guide to the future. I think base rates are the best tool we have when trying to predict what will happen going forward. But relying on the fact that something has never happened in the past to predict that it will never happen in the future… Read More
The outperformance of value stocks that occurred on September 9th is “unnerving to investors because a rotation away from growth could “result in a downturn for the broader market, some fear.” This according to an article in CNBC. Growth stocks, the article notes, “have blown their value counterparts out of the water over the past five years,” and outperformed the S&P 500 over the same period. The article reports that some investors see the sudden… Read More
A recent article in Advisor Perspectives offers highlights of an interview with Robert Rodriguez, award-winning fund manager and former managing partner at Los-Angeles-based asset manager FPA. Here is a summary of his comments: “Monetary policy has gone from the ridiculous to the absurd. The Fed, in my opinion, is clueless and is driven by theories with little basis in reality.” He believes that the central bank has been “consistently on the wrong side of economic… Read More
When Third Point’s Daniel Loeb and Greenlight Capital’s David Einhorn took the plunge into what a recent Barron’s article describes as the “warm waters of the reinsurance business”, the article explains, they “sought to emulate Berkshire Hathaway, where Warren Buffett has successfully combined insurance with sizable equity investments and earned outsize returns on both.” The idea was to attract investors with a tax-advantaged alternative to investing in the hedge funds themselves, while providing greater liquidity… Read More
In response to former Fed Chairman Alan Greenspan’s reported comments that negative interest rates wouldn’t be “that big of a deal,” a recent Bloomberg article rebuts, “it’s wrong. Negative interest rates represent a threat to the financial system.” The article explains, “the fractional reserve banking system is leveraged to interest rates. This works when rates are positive.” It adds, “in a negative rate environment, the bank must pay to hold loans and securities. In other… Read More
Value stocks have underperformed growth “in all but one year,” but saw a shift last week. This according to a recent article in The Wall Street Journal. On Monday, September 9th, the article reports that value stocks “had one of their best days relative to growth shares since the financial crisis,” with the trend continuing into Tuesday the 10th. The article suggests that one possible factor is the rebound in Treasury yields, “as investors sold… Read More
The yield curve may identify periods where the value premium is more attractive, according to research published by quant firm FactorResearch. The article presents findings from a study using data from the Kenneth French library and the U.S. Federal Reserve showing that, since 1971, the “performance of the Value factor was negative when the yield curve was flattening:” “We observe that the returns of the Value factor were negative when the yield curve was flattening… Read More
A new study from the research firm Grantham Mayo Van Otterloo (GMO) shows that the erosion of the value premium over the last decade was due to “changes in relative valuations that favored growth over value, but now value stocks are priced attractively.” This according to an article in Advisor Perspectives. Relative valuations, the article explains, “refer to the difference in metrics, such as price-to-book ratios, between value and growth stocks.” The article reports that… Read More
The billionaire founder of Bridgewater Associates believes that the ability of central banks to reverse an economic downturn is waning as the global economy enters “the late stages of the long-term debt cycle.” This according to a recent Bloomberg article. The article reports that in a recent essay posted on LinkedIn, Dalio wrote: “Interest rates get so low that lowering them enough to stimulate growth doesn’t work well.” Increasing the money supply and buying financial… Read More
Michael Burry, whose bet against mortgage securities before the 2008 crisis was immortalized in the film “The Big Short” sees another contrarian opportunity in what he characterizes as a “bubble” in passive investment. This according to an article in Bloomberg. The article says, “As money pours into exchange-traded funds and other index-tracking products that skew toward big companies, Burry says smaller value stocks are being unduly neglected around the world.” In a note to Bloomberg… Read More