Jack and I had the honor of attending the Evidence-Based Investing conference, hosted by the team at Ritholz Wealth Management. Wow. What a great event and a great group of inspiring investors and thinkers. Abe, Meb, John, Mike, and I had the opportunity to chat about systematic investing. Mr. Lincoln was a little lost during the conversation, but that’s okay — he’s old. One of the more “provocative” items we discussed was the use of low volatility as a signal for stock selection. Tom Brakke has me quoted as saying the following:
Right now, low-vol is expensive crap. You should be buying cheap crap.Zero points for eloquence. Three points for simplicity. At first glance, portfolios that sort on a low volatility signal have done well, historically. But further investigation into the subject suggests that a lot of the mojo in low-volatility is likely associated with the well established premias attached to value and momentum — not something incredibly unique and/or different. In fact, we covered a paper in May of this year (near the peak of low-vol relative performance) that makes this very point — low vol only adds a differentiated return when low vol stocks are cheap (quintile 5): In practice, what does this mean? It means that if you already own value (which probably has quality mixed in) and momentum inside a broader diversified portfolio, the marginal benefit of adding low-vol seems pretty weak, in general. And the argument for adding low volatility exposure when low volatility stocks are generally expensive is a decidedly terrible idea (e.g., ask low vol investors how they feel over the last few months?).