When academics evaluate a strategy like value or momentum, they test the data in a variety of ways to make sure that the effect that they are studying is real and not spurious (to use their term for bogus). When Rolf Banz first proposed the small cap effect in 1981 (the original study can be found here), he used US return data from 1936 to 1975. He used the data that was available to him… Read More
The other night while washing the dishes, I had the thought that St. Louis is a mid-cap, meaning that the size of our fine city is roughly equivalent to a mid-sized US company. It’s a weird thought, but I thought it would be fun to carve up US cities the same way that researchers carve up the capitalization of the stock market. I started at Wikipedia with a list of… Read More
The social media company Twitter (ticker symbol: TWTR) announced yesterday that first quarter revenue grew less than expected and told investors to expect lower sales growth in the near future as well. As a result, the stock was down almost -20 percent in late trading. When I first saw the headlines, my immediate thought was, ‘this is why you don’t buy growth stocks – when they disappoint on growth or… Read More
Last week, I wrote that it was difficult to find ‘alternative’ investments that were truly diversifying and that, as a whole, alternatives provide basic broad market exposures that you can find less expensively elsewhere. Click here to refresh your memory. A client wrote in after that email to ask if we would ever consider gold. I wrote about gold a little more than a year ago (twice because it’s such… Read More
It’s been almost five years since the ‘flash crash,’ when markets fell by about nine percent in less than 40 minutes in the middle of a trading day. Some well-established companies like Procter & Gamble fell by 40 percent within one minute while others like Sam Adams traded for just one penny per share even though it was selling for around $60 per share minutes earlier. I remember it vividly… Read More
Wednesday night, I was reading a new paper by some of the principles at AQR titled, ‘Fact, Fiction and Value Investing.’ You can find a copy here and this follows on a paper that they wrote last year called, ‘Fact, Fiction and Momentum Investing (which you can find here).’ Now that you’ve read our primers on value and momentum investing, no further explanation is required, although if you want a refresher, you… Read More
Last Friday, Chinese regulators said that they were going to make borrowing on margin more difficult for investors in an effort to curb the recent euphoria in Chinese stocks. I have to admit that I didn’t grasp just how hot Chinese markets have been recently, partly because the Chinese stock markets are broken up into multiple segments that are hard to follow and have dramatically different returns. The Hang… Read More
We may not be happy with the slow and choppy recovery from the 2008 financial crisis, but I think we would all agree that we can thank our lucky stars that we aren’t suffering like the Greeks. The definition of an economic depression isn’t precise, but I think we can all agree that Greece is mired in a horrible depression: the economy is almost 30 percent smaller on an inflation… Read More
In recent weeks, I’ve written about two well known risk factors, the size premium and the value premium. Today, I’ve got a more difficult topic to cover: momentum. Virtually everyone agrees that you can find evidence of momentum in the data, but there’s a lot of disagreement about why it exists and how it should or shouldn’t be applied in the real world. In short, momentum is the tendency for stocks that… Read More
They say that the only free lunch in finance is diversification. With stocks trading at lofty valuations and bonds yields historically low, it’s sensible to look at other alternative strategies that could potentially lower risk or increase return (or better yet: do both). Over the last five years, investors have flocked to ‘alternative’ investments, although the definition of alternative is pretty broad and can include things as generic as REITs… Read More
