One of the major challenges that the finance community has faced over the years is how to explain what drives stock returns over time. If the market is efficient, then the only way to generate excess returns is to take more risk. But risk only makes sense to take if you get compensated for it. Determining which risks receive that compensation has been the subject of significant research in the academic community for many years.… Read More
When most investors hear the word “yield” they immediately think about dividends. Things like stock buybacks and debt paydown typically don’t come to mind. But those are also yields, or ways companies can return cash to shareholders. When dividends, buybacks and debt paydown are combined, they give us something called shareholder yield. Calculating and sorting stocks by shareholder yield is a systematic way to identify companies that are returning cash to shareholders via these three… Read More
By Jack Forehand (@practicalquant) — Factor Investing poses some interesting challenges for wealth managers. On one hand, the evidence is very strong that investing using factors produces superior to returns to market cap weighted indexes over the long-term. On the other, factor strategies introduce another set of behavioral problems for clients because the extended periods of underperformance that are common in factor investing can lead to bad decision making and underperformance relative to index funds… Read More
Bill Gross, who defined his career by beating benchmarks in the bond market, says the days of outperformance are largely over. This according to an article in Bloomberg. “There are things to look at that still exist in the market that can generate alpha, although the probabilities of generating historical alpha in the same way are much less than they were,” Gross told Bloomberg in a recent interview. He attributes this in part to lower… Read More
Research has found that valuation metrics and spreads can provide useful information with regard to future returns, according to an article in ETF.com by BAM Alliance research director Larry Swedroe. Metrics such as earnings yield or CAPE, the article says, “have information in terms of future returns—the higher the earnings yield, the higher the expected return; and the larger the spread in valuations between growth and value stocks, the larger the future value premium is… Read More
Older investors focused on landing fat returns by taking on more risk might be putting their retirement in harm’s way, according to a recent article in The New York Times. Taking on more risk in the hopes of earning bigger gains can not only jeopardize investments but also the lifestyle retirees had been planning for. The article cites comments from several financial advisers regarding how they address this issue with clients. For clients who want… Read More
A recent article by Bloomberg columnist Barry Ritholtz warns investors that although huge wins get more attention than smaller, “routine” wins and losses, those windfalls don’t necessarily represent smart investment decisions. “Focusing on a single outcome versus a repeatable process raises more questions than it answers,” Ritholtz writes, including the following: Were the results of the winning trade statistically significant? Was the trade the result of luck or skill? What is the long-term record of… Read More
In a recent interview with Yahoo Finance, Berkshire Hathaway CEO Warren Buffett explained why he is bullish on bank stocks: “They’re businesses I understand, and I like the price at which they’re selling relative to their future prospects;” “I think ten years from now they’ll be worth more money and I feel there’s a very high probability that I’m right;” “I don’t think that it will turn out to be the best investment at all, of the… Read More
The Akre Focus Fund takes the buy-and-hold strategy seriously, according to an article in The Wall Street Journal. John Neff, one of the $9.8 billion fund’s portfolio managers, explains that investment decisions are made based on four criteria: Analysis of a company’s business model, which involves looking for a “significant competitive advantage, high return on capital and attractive growth prospects.” Strong leadership in the form of “management teams with equal parts skill and integrity, because… Read More
An article in The New York Times describes a trend in Silicon Valley whereby employees of tech start-ups are leaving to form new businesses, gaining support from “mafia” networks of former alumni. This isn’t a new phenomenon, according to the article, which says the cycle began back in the 1950s when a group of disgruntled Shockley Semiconductor employees (referred to as the “Traitorous Eight”) left to form Fairchild Semiconductor. The trend continued decades later with… Read More
In this year’s letter to Berkshire Hathaway shareholders, billionaire CEO Warren Buffett wrote that the mere thought of completing another big acquisition “is what causes my heart and Charlie’s to beat faster.” This according to a recent Bloomberg article. Since its last big deal—the 2016 purchase of Precision Castparts for $37 billion– the company has not been able to find another “elephant-sized” channel for its over $100 billion in cash. “Lately,” the article says, “investor… Read More
“To be good investors or research analysts, we need the right genetic predisposition and then must create the right circumstances to practice and hone these skills,” writes Joachim Klement, CFA in a recent article for CFA Institute. Klement prefaces his argument with a discussion about how, surprisingly, the influence of genetic traits increases over time, perhaps because our environment “reinforces genetically determined talent and hones this talent through deliberate practice”. He segues the discussion into… Read More